Many retirees could outlive a million dollar nest egg

[daylatedollarshort]

While your math is undoubtedly accurate, it's naive.

DW and I spend a multiple of $39k annually, living modestly in suburban Chicago. We would not have RE'd if doing so meant living on $39k.

I have no problem with your desire for you and your spouse to live on (pay taxes, provide housing, food, entertainment, medical care, clothing, gifts to the grandkids, etc.) $39k. We just chose another path.

The 39K isn't from my budget. As I noted in my post, it is from the "consumer expenditure survey from 2011, average annual expenses for 65+ households of 1.7 members are $39K."

The Consumer Expenditure Survey is from the Department of Labor. Here is the link to the table by age of household -
http://www.bls.gov/cex/2011/Standard/sage.pdf

If you want to call the Consumer Expenditure Survey numbers naive, I guess that is your choice. Usually people do not assign human qualities to numbers from tables.

From the DOL web site -

The Consumer Expenditure Survey (CE) program consists of two surveys, the Quarterly Interview Survey and the Diary Survey, that provide information on the buying habits of American consumers, including data on their expenditures, income, and consumer unit (families and single consumers) characteristics. The survey data are collected for the Bureau of Labor Statistics by the U.S. Census Bureau.


The CE is important because it is the only Federal survey to provide information on the complete range of consumers' expenditures and incomes, as well as the characteristics of those consumers. It is used by economic policymakers examining the impact of policy changes on economic groups, by businesses and academic researchers studying consumers' spending habits and trends, by other Federal agencies, and, perhaps most importantly, to regularly revise the Consumer Price Index market basket of goods and services and their relative importance.

 

[youbet]

The 39K isn't from my budget. As I noted in my post, it is from the "consumer expenditure survey from 2011, average annual expenses for 65+ households of 1.7 members are $39K."

The Consumer Expenditure Survey is from the Department of Labor. Here is the link to the table by age of household -
http://www.bls.gov/cex/2011/Standard/cusize.pdf

If you want to call the Consumer Expenditure Survey numbers naive, I guess that is your choice. Usually people do not assign human qualities to numbers from tables.

From the DOL web site -

The Consumer Expenditure Survey (CE) program consists of two surveys, the Quarterly Interview Survey and the Diary Survey, that provide information on the buying habits of American consumers, including data on their expenditures, income, and consumer unit (families and single consumers) characteristics. The survey data are collected for the Bureau of Labor Statistics by the U.S. Census Bureau.


The CE is important because it is the only Federal survey to provide information on the complete range of consumers' expenditures and incomes, as well as the characteristics of those consumers. It is used by economic policymakers examining the impact of policy changes on economic groups, by businesses and academic researchers studying consumers' spending habits and trends, by other Federal agencies, and, perhaps most importantly, to regularly revise the Consumer Price Index market basket of goods and services and their relative importance.

Did you link the correct charts? I can't find the $39k or the 1.7 members/consumer unit or any numbers pertaining only to consumer units 65 yo or older.

My comment was not in reference to the numbers, but to their use in your calculations.

 

[omni550]

Did you link the correct charts? I can't find the $39k or the 1.7 members/consumer unit.

My comment was not in reference to the numbers, but to their use in your calculations.

http://www.bls.gov/cex/2011/Standard/age.pdf contains the $39K and 1.7 members/consumer unit for "65 years and older" youbet.

omni

 

[daylatedollarshort]

Did you link the correct charts? I can't find the $39k or the 1.7 members/consumer unit or any numbers pertaining only to consumer units 65 yo or older.

My comment was not in reference to the numbers, but to their use in your calculations.

I did the size one by accident. I updated my link to the age tables.

 

[youbet]

I did the size one by accident. I updated my link to the age tables.

Ah..... I see the correct info now. Thanks, and also to omni550, for the correction.

This would be a matter of opinion, but I would use the income of the 65 - 74 yo group ($52.5k) as a benchmark rather than the non-tax expenditures ($39k) of the 65 to infinity group. Two reasons:

1. In FIRE planning, I preferred to look at gross income levels of various demographic groups as opposed to non-tax expenditure levels and compare those to my plans for retirement income.

2. We've discussed here on the forum a number of times the impact of extreme aging on spending levels. There seems to be a reduction in spending as folks reach the late 70's and up. So rather than include the folks in that category, I'd use the 65 - 74 number as opposed to the 65 to infinity number which includes the much lower 75 and older group.

But, we all decide how much is enough and build our models based on how we interpret the data. I just think your $39k is too optimistic for 2 people. I'd go with the $52.5 number.

I'm not sure how to account for the 1.7 member average comsumer unit size. 2 person units might need a few more bux?

 

[daylatedollarshort]

Ah..... I see the correct info now. Thanks, and also to omni550, for the correction.

This would be a matter of opinion, but I would use the income of the 65 - 74 yo group ($52.5k) as a benchmark rather than the non-tax expenditures ($39k) of the 65 to infinity group. Two reasons:

1. In FIRE planning, I preferred to look at gross income levels of various demographic groups as opposed to non-tax expenditure levels and compare those to my plans for retirement income.

2. We've discussed here on the forum a number of times the impact of extreme aging on spending levels. There seems to be a reduction in spending as folks reach the late 70's and up. So rather than include the folks in that category, I'd use the 65 - 74 number as opposed to the 65 to infinity number which includes the much lower 75 and older group.

But, we all decide how much is enough and build our models based on how we interpret the data. I just think your $39k is too optimistic for 2 people. I'd go with the $52.5 number.

I'm not sure how to account for the 1.7 member average comsumer unit size. 2 person units might need a few more bux?

Even if you used the 65 - 74 age group for the entire retirement period, the expenditures are still only $44.7K, and they drop to $32K after 75.

$52.5 is income for one age group in one 10 year period. And even then income drops to $32K after age 75, so even if you did use income, the $52.5 is only applicable for the first ten years of retirement, not a 25 or 30 year time span.

My expenditure numbers are neither optimistic nor unoptimistic. I just took the expenditure numbers from the tables of what people actually spend over age 65 based on the Department of Labor data.

I did base my calculation on a zero real return. At 3% inflation on expenses and 4% investment return on the portfolio, a $13.5K portfolio draw down would last 128 years.

Even if you used the $52.5 income with $25.5 SS and zero real, that would leave a portfolio draw down of $27K per year, $1M / $27K annual draw down = 37 years.

I accounted for the 1.7 household size by multiplying the average SS monthly benefit by 1.7. A household of two would have higher expenditures but also higher SS benefits. Couples don't usually die at the same time so a 1.7 household size is probably more realistic than using 2 for the whole retirement time period anyway.

 

[Independent]

I don't think that's true Independent. Most "full-time, year-round workers get medical insurance subsidies, employer contirbution to SS, pension or 401k plan subsidies, etc. These benefits are NOT included in the annual salary numbers published by our gov't.

I was responding to this comment

.. are subsidized. Either by government, family & friends or loans. ..

I thought the poster was referring to means-tested gov't programs like EITC, SNAP, Medicaid, etc. I think the intent of the post was that "middle class" doesn't mean "middle income". "Middle class" has some element of "self supporting, through my own labor", and a statistic that picks up everybody gets people who aren't self-supporting. Hence my response that the statistic I picked was intended to be limited to self-supporting workers.

It's true that most full-time, year-round workers get a benefit package in addition to cash. That's part of their total, earned compensation. When we look at how much of our incomes we need to replace in retirement, we need to think about the benefits. We certainly don't need to replace the 401k contributions or FICA taxes. We do need to replace medical insurance.

 

[Independent]

I did the size one by accident. I updated my link to the age tables.

I like to see other people looking at the Consumer Expenditure tables. I think they are a good source of information on spending.

Note that the CEX also provides "cross-tabulated" tables that give slightly finer breakdowns. So we can see that average expenditures for households with exactly two people were about $50,800 if the head-of-household was 65-74, and $40,900 if the HOH was 75 or older.

ftp://ftp.bls.gov/pub/special.requests/ce/CrossTabs/y1011/sizbyage/atwo.TXT

If I guess about $30k of SS benefits, it seems that $1 million in assets covers their actual spending. But then there's the complication of what percent of these couples feel that their retirement isn't working financially, the difference between mean and median, the impact of home equity in both the assets and the spending, your point on deaths at different dates, etc.

 

[Independent]

I agree with you than more than 50% of the population lives on $45k or less. My original point is that to have a fully funded, no geographic limitation, comfortable, worry free middle class lifestyle, it is not uncommon at all to need $50 to $75 per year. If you have no pension and receive only $15k to $25k in SS, you will need a $1M+ portfolio to guarantee your standard of living indefinitely.

This is better, I appreciate the numbers. I think you're saying that an individual who feel he needs $50k to $75k per year to live "comfortably" will want to save more than $1 million. That's reasonable to me. Those numbers would reflect withdrawal rates of 3.5% - 5.0% on $1 million, which are somewhat aggressive these days.

My problem was with the notion that this represents "most" single people.

 

[Katsmeow]

This is better, I appreciate the numbers. I think you're saying that an individual who feel he needs $50k to $75k per year to live "comfortably" will want to save more than $1 million. That's reasonable to me. Those numbers would reflect withdrawal rates of 3.5% - 5.0% on $1 million, which are somewhat aggressive these days.

Well, in part this will depend upon SS and when taken and whether a couple or individual. And I would submit that for most people how much SS will be received has something to do with the lifestyle that the person earned during work and the lifestyle that person might want in retirement. For example, in my case my age 66 SS for me alone is $30k a year. DH took it early and receives $23k. So if I take at 66 (I'm not sure yet when I'll take it. I may take half of DH's at 66 and then switch to mine at 70), we would already have $53k and the portfolio would then easily probably enough income above that.

On the other hand let's take a couple whose age 66 SS is $15k each for a total of $30k. I would guess this is a couple who had lower earnings while working and would probably be happy in retirement for $50k or $60k during retirement as this couple had to save more while working to even build up the million dollars in the first place.

Of course, that won't always be true and there is a lot of variation. A great deal of my objection to the article was that it painted too broad a brush.

 

[Andre1969]

Even if you used the 65 - 74 age group for the entire retirement period, the expenditures are still only $44.7K, and they drop to $32K after 75.

The only example I have experience with is my grandmother, who is 89. She doesn't drive anymore, the house is long since paid for, she's still pretty healthy, and has good health insurance. I don't know every single detail, but I'd say she's making it on under $20,000 per year. The two biggest expenses, I'd say, are property taxes (around $3100 per year) and the oil bill (around $3300 per year).

I'd imagine that my grandfather (Dad's side of the family) is in a similar situation. He's 98, doesn't drive, paid for house, and good health insurance. His property taxes are also around $3,000 per year, but overall he might pay even less. I think his combined electric/natural gas bill comes out to around $200 per month.

 

[Independent]

Well, in part this will depend upon SS and when taken and whether a couple or individual. And I would submit that for most people how much SS will be received has something to do with the lifestyle that the person earned during work and the lifestyle that person might want in retirement. For example, in my case my age 66 SS for me alone is $30k a year. DH took it early and receives $23k. So if I take at 66 (I'm not sure yet when I'll take it. I may take half of DH's at 66 and then switch to mine at 70), we would already have $53k and the portfolio would then easily probably enough income above that.

On the other hand let's take a couple whose age 66 SS is $15k each for a total of $30k. I would guess this is a couple who had lower earnings while working and would probably be happy in retirement for $50k or $60k during retirement as this couple had to save more while working to even build up the million dollars in the first place.

Of course, that won't always be true and there is a lot of variation. A great deal of my objection to the article was that it painted too broad a brush.

Yes, it is very likely that somebody who is targeting $50k in retirement earned more than that while working. The PIA for a worker with Indexed Annual Earnings of $50k is about $21,300. For $75k, $26,000. In my post, I assumed 75% of those numbers because I thought the NYT article was targeting retirement at 62.

I should have checked the article. It mentions age 65 a number of times. The article also specifies that the $1 million includes equity in the house, which isn't income producing.

Note that jkern was specifying a single individual. That's kind of where we got started. I said that it would be much easier for a single person to retire on $1 million than for a couple.

 

[Katsmeow]

Yes, it is very likely that somebody who is targeting $50k in retirement earned more than that while working. The PIA for a worker with Indexed Annual Earnings of $50k is about $21,300. For $75k, $26,000. In my post, I assumed 75% of those numbers because I thought the NYT article was targeting retirement at 62.

I should have checked the article. It mentions age 65 a number of times. The article also specifies that the $1 million includes equity in the house, which isn't income producing.

Note that jkern was specifying a single individual. That's kind of where we got started. I said that it would be much easier for a single person to retire on $1 million than for a couple.

Yes but I was using an example someone whose PIA at FRA would be $15,000. That would be someone with earnings below $50k so likely to be happy during retirement with $50k and it would be more than they made while working.

 

[Independent]

Yes but I was using an example someone whose PIA at FRA would be $15,000. That would be someone with earnings below $50k so likely to be happy during retirement with $50k and it would be more than they made while working.

I guess I've lost track of examples and points. I don't know if I'm agreeing or disagreeing with you. I can do some numbers and see what I can say:

A PIA of $15k is consistent with average indexed earnings of $30k.

I'm willing to say that a single person with $1 million savings and a $15k SS benefit can easily get a 100% replacement ratio on from that combination, so $1 million is "enough".

But, $30k is significantly less than the median earnings of $45k, so this example doesn't tell me that "most" people can live on SS + $1 million.

Then I can look at a couple with a combined SS benefit of $30k derived from annual indexed earnings of $60k. Again, $1 million savings should (assuming some equities) be able to fill the gap up to any reasonable retirement income target. Even if they target 100%, that only requires 3% withdrawals.

But, $60k is well below the median income for a couple with two jobs, so again I can't claim that proves that "most" couples can live on SS + $1 million.

 

[daylatedollarshort]

But, $60k is well below the median income for a couple with two jobs, so again I can't claim that proves that "most" couples can live on SS + $1 million.

The article referred to retired households. The Consumer Expenditure Survey shows that average households do spend less in retirement. After age 75, average household spending drops to $32K a year.

Households who save $1M most likely will get more than average SS. The maximum benefits at full retirement age for two high earners is $60.8 just in Social Security benefits alone.

And in retirement they are usually not supporting kids, saving for college, saving for retirement, paying SS taxes, incurring work and commute related costs, etc.

 

[Independent]

The article referred to retired households. The Consumer Expenditure Survey shows that average households do spend less in retirement. After age 75, average household spending drops to $32K a year.

Households who save $1M most likely will get more than average SS. The maximum benefits at full retirement age for two high earners is $60.8 just in Social Security benefits alone.

And in retirement they are usually not supporting kids, saving for college, saving for retirement, paying SS taxes, incurring work and commute related costs, etc.

All those statements seem to be true. I expect that you feel they imply some conclusion, but I'm not sure what that conclusion is or how it connects the the post you quoted.

 

[youbet]

But, $60k is well below the median income for a couple with two jobs, so again I can't claim that proves that "most" couples can live on SS + $1 million.

I think that's the bottom line Independent. While it's entertaining to watch some folk's eyes flutter at the prospect of retiring (a couple) with a house and portfolio valued at one million bux (Wow! Millionaires!), a net worth of one million bux ain't what it used to be. And it very well might not meet reasonable retirement expectations of the middle or upper-middle class folks who put it together. The plan might even "fail" if the couple fails to recoginize the error of having too high a WR early enough.

That's all the authors were trying to say. I doubt the intended taget audience of the article were folks on this discussion board.

 

[razztazz]

It never ceases to amaze me how many people believe that you can't possibly be curious, stay active, or be doing something you are really interested in, unless you are WORKING!

Most of this "Work ethic" crap was invented by people who make money off of other people working for them. Cheap labor types. In the old days when everybody had to do their own huntin' & gath'rin' conservation of energy was the rule. Work = do as little as possible. Rest = what you're working for. It was only framed as an ethic, a moral, or a virtue when other people found that owning was more profitable than doing.

 

[daylatedollarshort]

All those statements seem to be true. I expect that you feel they imply some conclusion, but I'm not sure what that conclusion is or how it connects the the post you quoted.

My point is that most households can easily live on $1M + SS in retirement. If you read the Millionaire Next Door, most millionaires actually do live like the people on this board and know how to stretch a dollar.

They are investors and savers, not hyper-consumers. I think the kinds of chicken little articles like the one in this thread have hidden agendas.

 

[youbet]

My point is that most households can easily live on $1M + SS in retirement. If you read the Millionaire Next Door, most millionaires actually do live like the people on this board and know how to stretch a dollar.

They are investors and savers, not hyper-consumers. I think the kinds of chicken little articles like the one in this thread have hidden agendas.

You seem to have a "Theory X" outlook toward the article/author. I look at the article as a bit of a reminder that a million bux in assets (house + portfilio) isn't the fortune some middle class folks like to think it is. If they're making a combined, say, $125k/yr, they might need to reduce expenditures in retirement more than they're anticipating in order to have a high probability of success. Even with a $300k house and $700k in investments, it's likely they should stay on the savings track unless they're ready to reduce expenditures by half or so in retirement.

It's a message a lot of folks need to hear and applies to some folks we know. I wouldn't look at it as a "Chicken Little" article as you do.

 

[Katsmeow]

But, $60k is well below the median income for a couple with two jobs, so again I can't claim that proves that "most" couples can live on SS + $1 million.

The article is about retirement. We know that most retired couples can live on SS + $1 million since most couples don't have a million and yet they somehow manage to live.

But - this is I think beside the point of the criticism of the article.

I do not doubt some people indeed want a portfolio larger than $1 million for retirement. I do not doubt that different places had different living costs so $1 million goes much farther in some places than others.

The problems with the article is not with those facts.

The article used absurd asset allocations to skew the withdrawal rate (IMHO) and made an assumption about the income of people who have a million (assumed $150k) then assumed that 80% of that - $120k - would be the desired retirement spending. Based upon all that, then $60-70k wouldn't be enough so work until 70....

As you can see, a lot of the rot sets in when assuming you need 80% of income replacement during retirement and in assuming (on thin data) that pre-retirement income was $150k. Even assuming pre-retirement income was $150k, the concept that pre-retirement spending is a flat percentage of pre-retirement income is one that has been debunked thoroughly on this forum.

Because the author (shallowly in my view) used the 80% flat replacement rate, he didn't do anything to really thoughtfully consider expenses during retirement and to consider how much most people with a million and SS really do spend during retirement. Instead, he just looking at 80% of $150k saw that it was $120k and knew $1 million plus SS wouldn't sustain that kind of spending and suggested working until 70.

To me, that kind of reasoning is shallow and lacking and could mislead people. Many here may make cogent arguments why - for the given person - some people might want to spend more than, say, $70k during retirement and so might need more. But - that isn't what the author did. He just multiplied $150k by 80% and had done with it.

 

[daylatedollarshort]

It's just one more don't retire, work longer because you need 80% of your previous income (not even expenses) in retirement article to add to the pile.

"..., if you’re lucky you’ll find work that you like and can stick with for a long time — until 70, at least."

"Without another source of income, perhaps from traditional pensions from either or both spouses, he adds, a household like this won’t come close to replacing 80 percent of its pre-retirement income — often considered an acceptable target level."

 

[Independent]

The article is about retirement. We know that most retired couples can live on SS + $1 million since most couples don't have a million and yet they somehow manage to live.

But - this is I think beside the point of the criticism of the article.

I do not doubt some people indeed want a portfolio larger than $1 million for retirement. I do not doubt that different places had different living costs so $1 million goes much farther in some places than others.

The problems with the article is not with those facts.

The article used absurd asset allocations to skew the withdrawal rate (IMHO) and made an assumption about the income of people who have a million (assumed $150k) then assumed that 80% of that - $120k - would be the desired retirement spending. Based upon all that, then $60-70k wouldn't be enough so work until 70....

As you can see, a lot of the rot sets in when assuming you need 80% of income replacement during retirement and in assuming (on thin data) that pre-retirement income was $150k. Even assuming pre-retirement income was $150k, the concept that pre-retirement spending is a flat percentage of pre-retirement income is one that has been debunked thoroughly on this forum.

Because the author (shallowly in my view) used the 80% flat replacement rate, he didn't do anything to really thoughtfully consider expenses during retirement and to consider how much most people with a million and SS really do spend during retirement. Instead, he just looking at 80% of $150k saw that it was $120k and knew $1 million plus SS wouldn't sustain that kind of spending and suggested working until 70.

To me, that kind of reasoning is shallow and lacking and could mislead people. Many here may make cogent arguments why - for the given person - some people might want to spend more than, say, $70k during retirement and so might need more. But - that isn't what the author did. He just multiplied $150k by 80% and had done with it.

I can agree with all of this. The author should have said that people with noticeably higher-than-average incomes, who want to spend a high proportion of their pre-retirement incomes after they retire, and don't have DB pensions, will need to save more than $1 million. Furthermore, this is especially true if they think they should be heavily into bonds after retirement. I think that's correct.

The problem with the article is the suggestion that this is "most" people. I got into this discussion when a poster said that "most" single people need more than $1 million.

I'm pretty sure that "most" single people can make it on $1 million + SS. I think it's a closer call for the median couple - depends on specific circumstances.