How do you beat inflation in retirement?

[mike45]

I'm a single 31 year old, have a paid off home in San Diego, no debt and I'm on track to retire at 48 with 1.5MM. With a diversified portfolio I think I could live off of my investments at 4.5%, which would give me $67,500/year without touching the principal. That seems nice, but inflation is scaring the heck out of me. The fact that the 1.5MM will only be worth about $600k by the time I'm 65 is depressing. Is there any possible way I could keep the same standard of living forever?

Also, is it even possible to live off investments while keeping the 1.5MM forever?

 

[GrayHare]

The general advice is to invest significantly in assets that appreciate at least on pace, and usually more than, the rate of inflation. Equities have done so historically.

 

[Rustic23]

At 3%, which many consider the long term inflation rate, although it has been running closer to 2% last few years, your 1.5 million will buy about $900,000 worth of stuff, and your $67,500 living expense will cost you about about $111,000. I think you will find most on this site would consider it close to plan on a 4.5 withdrawal rate. (those are close figures from my HP-12C your numbers may be slightly different or heck I could have screwed them up, but I don't think so)

 

[ERD50]

A 4.5% withdraw rate, adjusted for inflation each year, is very risky for a retirement @ 48 YO. Try entering that into FIRECalc, with a 45 year term portfolio to reflect a retirement to 93 YO. I picked 45 years, as if you go much longer the calculator has to drop off more recent scenarios that have been failures for retirees, so it might give a too optimistic picture.

I think you'll find something closer to 3% will hold up that long historically.

-ERD50

 

[gerntz]

Lwbym.

 

[walkinwood]

I applaud your confidence in projecting your net worth 17 years into the future!

Read up on Bengen. You'll see that a 60/40 portfolio survived the worst histroical periods with a roughly 4% initial withdrawal rate adjusted for inflation for 30 years with (IIRC) a 95% probability. Guyton has a variable withdrawal method that shows SWR for success over 40 years - IIRC, that was 4.5%.

You have plenty of time to study the research & by the time you are ready to ER, the research will be much better too!

All the best.

 

[athena53]

As others have said, you need to be able to keep a healthy proportion of your investments in equities.

Having a paid-off home in San Diego is a big plus. Would you continue to live there or would you downsize and thus be able to free up some equity?

Finally, it's great that you have a projection going out that far. I developed a long-term projection spreadsheet when I was 50 (2003), with a projected retirement date of 65. It went off course a few times, naturally, but it really helped to have some concrete plans about what I was going to save every year and what investment income would be (using an average return) and to track actual vs. expected every year end. I retired at 61 instead, so that assumption didn't hold up, either! It sure helped to have been planning and tracking the whole way, though.

 

[daylatedollarshort]

For a single family household with a paid off home, do you really need $67.5K to live? If you can find creative ways to cut that in half without impacting your basic lifestyle, and find a part time hobby job that pays $20K a year when you retire from full time work, your numbers would look much better. Finding a job now with a pension is another option to consider.

 

[W2R]

The general advice is to invest significantly in assets that appreciate at least on pace, and usually more than, the rate of inflation. Equities have done so historically.

+1

I have managed to beat inflation nicely (so far!) by investing 45% of my portfolio in equity index funds.

Honestly I'd rather just keep all my money under the mattress, but you just can't DO that without being robbed blind by inflation. Even the risk-averse, like me, have to invest in something with higher risk/reward (such as equities) in order to protect against inflation.

 

[Birdie Num Nums]

...Also, is it even possible to live off investments while keeping the 1.5MM forever?

Why do you wanna keep $1.5M forever? You can't take it with you.

 

[Animorph]

I'm a single 31 year old, have a paid off home in San Diego, no debt and I'm on track to retire at 48 with 1.5MM. With a diversified portfolio I think I could live off of my investments at 4.5%, which would give me $67,500/year without touching the principal. That seems nice, but inflation is scaring the heck out of me.

4.5% for 40 years with standard FIRECalc defaults gives a success rate of 70.2%. That gives you CPI inflation raises each year, so inflation is accounted for to that extent. But, that says that if you retired with those parameters in the past, you would have depleted your portfolio before the end of the 40 years if you started in one of the 31 bad years.

Despite that, the "average" portfolio ending balance is 61% higher and the best result is 11x your starting value, in real today's dollars. So your portfolio may go to $0, grow larger, or it could even grow a lot. That assumes a portfolio that is 75% equities.

Your best bet is to tone down the 4.5% to something between 3% and 4%, in order to reduce the chance of failure.

The fact that the 1.5MM will only be worth about $600k by the time I'm 65 is depressing. Is there any possible way I could keep the same standard of living forever?

Something like a 3% initial withdrawal rate, adjusted for inflation, would have worked well at any time in the past for the U.S.. But the future is of course unknown. It wouldn't have worked very well with Japan's collapse I believe. You can also try taking 3% or 4% of the portfolio value at the start of each year. Guaranteed not to run out, though your income will vary.

Also, is it even possible to live off investments while keeping the 1.5MM forever?

Lots of people invest for dividends and interest, "income investing". You live off the dividends and interest and leave the shares alone. It can be a bit more relaxing than "total return" investing.

 

[David1961]

The general advice is to invest significantly in assets that appreciate at least on pace, and usually more than, the rate of inflation. Equities have done so historically.

+2. Well stated.

 

[Henry Lili]

Dividend growth investing as well. Investing in companies that increase the dividends paid each year.

 

[Birchwood]

I will be retiring in about 3 weeks, at age 63, luckily with several Mils in asset, that include retirement plan. As a frugal couple, no responsibility, we think we can live with 60-80K per year, including SSS. We certainly don't want the several mils to be left behind to our only daughter. We intend to spend a great part of it. The only reason to have a lots floating around is to pay for health care which is expensive as we grow older.

 

[mathjak107]

Dividend growth investing as well. Investing in companies that increase the dividends paid each year.

point of interest:

actually on an inflation adjusted basis with dividends included the s&p 500 is coming up on just about being even with 14 years ago.

84% of the s&p 500 and 100% of the dow pay dividends with histories of good increases and for 14 years they barely kept up with inflation.

in fact if you took a 5% withdrawal rate from the s&p 500 you would have seen a 63% increase over the 14 years in the s&p 500 with dividends while having a 66% decrease in balance WITH NO INFLATION ADJUSTMENT EVEN BEING TAKEN!.

since if you eliminated the two worst 30 year time frames in history the average safe withdrawal rate was 6.5% you actually failed to keep up with inflation pretty poorly using the dividend payers in the s&p or dow.

 

[mathjak107]

one thing i want to add about investing for rising dividends today.

as much as we all love our rising dividend payers lately those dividends have been coming at a very steep cost to compounding our returns.

as award winning fund manager chuck akre said , compounding on investor money is the key to growing money.

a penny doubled and compounded every day for only 31 days is over 10 million bucks . such is the power of compounding.

what is interesting is dividends have increased to the highest levels since 1998 with a record increase of 17.8 billion dollars in increased dividends payed out just 1st quarter. the 2nd quarter may be even bigger.

all dow stocks pay dividends and 84% of the s&p 500 does too.

but according to a study done by howard silverblatt at s&p those dividends have been coming at a price as they go up and up..

a good part of that capital from free cash flow is gone forever and no longer available for compounding.

mid-caps and small caps who pay little in dividends have been far and away providing far better compounding and use of investor money for much greater returns..

in fact one of the least efficiant ways to grow investor money now is paying it out as a dividend.

free cash flow in a company can be used to compound by buying back its own stock, investing in its own company or buying other companies . cash flow paid out as dividends loses its compounding ability and much of it is gone forever and can no longer compound.

many of the great companies in the s&p 500 have lagged behind their non dividend payers in the midcap and small cap markets who now seem to be much more efficient at generating compounding on investor money.

midcaps and small caps have compounded the last 5 years at rate of 5-6% higher then their dividend paying cousins. much of that growth came from stock buy backs and aquisitions with their free cash flow.


just something to think about going forward.,

 

[pb4uski]

I'm a single 31 year old, have a paid off home in San Diego, no debt and I'm on track to retire at 48 with 1.5MM. With a diversified portfolio I think I could live off of my investments at 4.5%, which would give me $67,500/year without touching the principal. That seems nice, but inflation is scaring the heck out of me. The fact that the 1.5MM will only be worth about $600k by the time I'm 65 is depressing. Is there any possible way I could keep the same standard of living forever?

Also, is it even possible to live off investments while keeping the 1.5MM forever?

I think you could retire on $1.5m at age 48 but you won't be able to live as large as you would like and you will die a pauper.

One thing you need to read about is "sequence of returns". That refers to scenarios where the first few years of retirement returns are poor so your withdrawals eat into principal too much so the portfolio cannot survive a long retirement. So if you want to retire on $1.5m you would need to limit withdrawals to about $50k a year (100% success rate) or $57k (95% success rate). Those withdrawals are for the first year of retirement and increase with inflation but assume that you are 85% in equities.

Lower percentage of equities would reduce the first year withdrawal but no very significantly. For example, a 60% equity portfolio first year withdrawals for 60% equities (all else held constant) would be $48k and $54k for 100% and 95% success rates, respectively.

Adverse sequence of returns can be mitigated by flexibility to adjust spending (reduce spending in bad times and splurge a bit during the good times) and/or take on some part-time work.

And to answer your last question of "is it even possible to live off investments while keeping the 1.5MM forever?" the answer is no as a practical matter unless you have WIDE flexibility to adjust your spending in bear markets.

 

[kcowan]

It went off course a few times, naturally, but it really helped to have some concrete plans about what I was going to save every year and what investment income would be (using an average return) and to track actual vs. expected every year end. I retired at 61 instead, so that assumption didn't hold up, either! It sure helped to have been planning and tracking the whole way, though.

We have a spreadsheet as well and it has helped us immeasurably. We timed our purchase of our snowbird residence until we could afford it (by living there for 6 months). Had we not had the long range financial plan, we would have bought on emotion when we retired and paid more than necessary for a vacation property.

It does not have to be detailed. We just carry over the actual spend each year.

 

[kcowan]

Mike
You plan to live on $67,500k a year. You can do this for 22.5 years. That will get you to age 70. Any net growth of your investments above inflation will extend these years.

That is what your numbers are saying. So how confident are you that your investments can beat inflation? If you achieve that by 2% then you can live for 2% longer.

I would not do it. If I really wanted to retire at age 48, I would look for a lower cost place to retire. If you move to a place where your spend drops to $33,750 per year then that adds 22.5 years and gets you to age 83.