$1Mil Enough? Age 35

[Dager]

I see many posters commenting that $1Mil is not enough to retire on, but I haven't found any posts that explain the reasoning behind such an opinion. Please excuse my naivety, but I'm lost in the shallow depths of my ignorant bliss. Perhaps someone can educate me and correct the error in my thinking. Here's my situation:

ASSETS:
House (no mortgage): $620k FMV
Stock Accounts: $1Mil

EXPENSES:
$560/mth (all necessities, incl. utilities, cell phone, internet)
$440/mth (groceries & gas)
Total=$1k/mth (this has stayed consistent for five years)

FAMILY:
Age 35 and married w/ two pre-teen kids (college fund already saved separately)

Based on our expenses of $12k/yr, our $1Mil savings should not be depleted for 83 years. If we double our expenses to allocate for emergencies, entertainment and occasional travel, our savings should still last 42 years. We live very comfortable; our expenses are low because of the area we live in, not because we are super frugal. I understand my calculation doesn't account for inflation, but I also didn't account for possible future appreciation of income (the savings has grown approx. 40% per year thanks to stock market).

So what am I missing here? Why can't I retire on $1Mil? Thanks in advance for your kind advice.

 

[Ready]

How much are you budgeting for medical insurance for a family of four?

 

[MasterBlaster]

A few comments...

1) What about healthcare. Does subsidized ObamaCare cover everything ?

2) For someone your age a safe withdrawal rate is about 3.5% of the nest-egg or so. That would provide $35k (before taxes) the first year and then adjust every year for inflation. If you can live on $35k (before taxes) then you are set. People can and do live on much less.

3) You could live another 50 or 60 years. Have you really thought about how you'll spend all that free time ? Are you prepared to hang out with the white-haired set while everyone else is working ?

4) Is the family on board with this or is it just you thinking along these lines?

 

[aaronc879]

I don't think you are including ALL of your expenses. Wouldn't property tax on a $600K+ house be at least $6K/yr?

 

[Dager]

At present, my wife is an executive at a major hospital and gets free health insurance for the family (no co-pays or deductibles). If we had to replace the insurance, the cost of a plan under the Affordable Care Act should be covered in our extra $12/yr we allocated above. Also consider that, if really necessary, we could use $620k equity from the house.

 

[marko]

Also consider that, if really necessary, we could use $620k equity from the house.

Red flag. That ain't free money; it adds another expense, so you'd be paying one expense with another...downward spiral.

 

[Dager]

Our property tax is $2k/yr. We purchased the house for $170k; it's value has risen dramatically due to our area. Tax increases in California are capped at 2% per annum.

 

[Animorph]

And how much of your portfolio is stocks, bonds, or cash?

You are good with a withdrawal rate of 1.25%. Your expenses will probably change in retirement, so make some allowance for that. Leave room for new cars, new roofs, new appliances, and new hobbies and activities as needed. Health insurance plus medical expenses could exceed your current expenses. Your expenses could rise if you move to a different area. And some growth of your portfolio, for inflation at least, would be nice. Though with that low of a WR your allocation is not critical.

 

[Ready]

I spend $600/month for groceries for a family of two. If you can live on $440/month for BOTH groceries and gas for four people you are certainly on the very low end of the spectrum of expenses people have shared on the forum. I'm sure a lot of people are wondering just how you are doing this. I certainly don't eat luxuriously, but I also don't eat a lot of processed food, which tends to be the least expensive. And I try to eat as much organic produce as possible so that I'm eating mostly food and not pesticides. This does add a fair amount to the grocery tab though.

 

[Letj]

I am very curious with the food budget. I too have a family of 4 with a teenager and one preteen and I find it impossible to feed my family proper meals under $1K. Also, we eat at least one and sometimes two meals away from home. Do you mind sharing how you do it?

 

[nun]

$12k/year for a family of four seems very frugal and you should be planning for future possibilities not your current circumstances.

I'm single, 52 and my assets are similar to yours and I just about feel comfortable retiring. Although my annual budget is $36k (no mortgage) which seems more realistic that your $12k estimate. My monthly food/drink budget is $400.

 

[Gus.]

So the property tax is included in the $1,000 per month? What about life insurance, car insurance, homeowner's insurance? Do the kids do any sports? Do you take vacations? Do you wear clothes?

How have you been tracking your spending? I find it hard to believe that you only spend $1,000 per month on a family of four in California.

 

[Corporateburnout]

So the property tax is included in the $1,000 per month? What about life insurance, car insurance, homeowner's insurance? Do the kids do any sports? Do you take vacations? Do you wear clothes?

How have you been tracking your spending? I find it hard to believe that you only spend $1,000 per month on a family of four in California.

+1

I didn't think there are any low cost of living areas in California.

 

[David1961]

I'd run your numbers through Firecalc (and play around with various AAs). The way I see it, your biggest risk is increased inflation given your long timeframe. It's low now but won't stay there forever.

How does your wife feel about you retiring and her continuing to work?

Are you planning on having more children?


And great job accumulating $1M by age 35!

 

[Ready]

+1

I didn't think there are any low cost of living areas in California.

There are "lower" costs of living in parts of California, such as Sacramento, San Bernardino, and Riverside. These places still may cost more than living in the mid west, but far less than living in Los Angeles or San Francisco.

I live in Orange County, which is considered to be one of the most expensive places to live in the country. However, since I have no mortgage, my only expense which is really high is property taxes. Other than that, I don't think I really pay any more for food, gas, entertainment, medical care, or other routine expenses than someone living in the mid west, or somewhere where you can buy a nice home for $150K. Once you remove the cost of housing, it's really not that expensive to live here. State income tax is high, but if you're retired, you're not earning money, so who cares.

 

[Corporateburnout]

There are "lower" costs of living in parts of California, such as Sacramento, San Bernardino, and Riverside. These places still may cost more than living in the mid west, but far less than living in Los Angeles or San Francisco.

I live in Orange County, which is considered to be one of the most expensive places to live in the country. However, since I have no mortgage, my only expense which is really high is property taxes. Other than that, I don't think I really pay any more for food, gas, entertainment, medical care, or other routine expenses than someone living in the mid west, or somewhere where you can buy a nice home for $150K. Once you remove the cost of housing, it's really not that expensive to live here. State income tax is high, but if you're retired, you're not earning money, so who cares.

Since I've only been to LA (numerous times), San Diego and San Fran I was not familiar with other parts of CA. This is good to know

 

[pb4uski]

IF you really only need $1,000/month and have $1m nestegg, then you should be all set. However, $12k a year isn't much to live on especially for a family of four but you presumably have your wife's income as well. Have you included any provisions in those number for health insurance, uninsured health care costs, traveling, home repairs, car repairs/replacements, etc?

At a conservative 2.5% WR you should be able to take $25k a year out of a $1m nestegg depending on how its invested. While I think you need to scrub your expenses to make sure they are so low - IF that is confirmed then financially you should be ok.

Will your wife be retiring as well?

Another thing to think through, especially at your age, is what are you going to do all day? I had a friend who retired at 50 and he had a very hard time finding people his age to "play" with (ski and windsurf in his case).

 

[Dager]

A few comments...

1) What about healthcare. Does subsidized ObamaCare cover everything ?

2) For someone your age a safe withdrawal rate is about 3.5% of the nest-egg or so. That would provide $35k (before taxes) the first year and then adjust every year for inflation. If you can live on $35k (before taxes) then you are set. People can and do live on much less.

3) You could live another 50 or 60 years. Have you really thought about how you'll spend all that free time ? Are you prepared to hang out with the white-haired set while everyone else is working ?

4) Is the family on board with this or is it just you thinking along these lines?

3) many hobbies and time w/ kids can keep me busy.
4) yes, partly b/c it was my sacrifice to led us to financial independence. I graduated from college in my teens and slaved 15 yrs in the corporate world to amass the earnings that paid for the house and is the basis for most of the savings. I'm burnt out and they all agree I deserve time to relax.
Thanks for your reply.

 

[Dager]

Red flag. That ain't free money; it adds another expense, so you'd be paying one expense with another...downward spiral.

Valid point. An equity loan releases cash but also generates an expense due to the existence of a new mortgage loan. An alternative is to downsize if necessity required it.

 

[Dager]

I am very curious with the food budget. I too have a family of 4 with a teenager and one preteen and I find it impossible to feed my family proper meals under $1K. Also, we eat at least one and sometimes two meals away from home. Do you mind sharing how you do it?

First, my food budget doesn't include restaurant meals; I've actually allocated that expense in the "entertainment" category (any luxury/excesses are in that category).

Second, we cook our meals and eat mostly rich dishes (a staple we grew up on) and we have lots of fresh fruits and veggie plants in our backyard (tomatoes, potatoes, apples, oranges, garlic, onion, etc.), so we save b/c we don't need most store bought fruits and veggies. I grew up poor, so I learned early on how to spend wisely (coupons are a must). Keep in mind that most Americans live on substantially less then we do, so when you ponder how anyone could have a food budget under $1k just think of the Walmart cashiers, the fast food workers, the gas station attendants, the retail clerks, etc.--I assure you they all live more frugally than I and many have larger families to feed.

 

[Dager]

$12k/year for a family of four seems very frugal and you should be planning for future possibilities not your current circumstances.

I'm single, 52 and my assets are similar to yours and I just about feel comfortable retiring. Although my annual budget is $36k (no mortgage) which seems more realistic that your $12k estimate. My monthly food/drink budget is $400.

Agreed that I should plan for future, but the present is oft an indicator and first tool for determining future expenses.

Not clear why you feel my $12k figure is unrealistic as all you've pointed out is that my figure is lower than yours. Keep in mind that a substantial portion of the population lives on a lower food and utilities budget than mine. I think as we succeed some lost sight of the fact there exists a lower middle class whom survive fine on lower budgets.

 

[Dager]

So the property tax is included in the $1,000 per month? What about life insurance, car insurance, homeowner's insurance? Do the kids do any sports? Do you take vacations? Do you wear clothes?

How have you been tracking your spending? I find it hard to believe that you only spend $1,000 per month on a family of four in California.

Been tracking spending for 15 years now. My monthly for food, gas, utilities doesn't change much each month. But you made some good observations...since I pay insurance premiums and taxes in a lump sum once each year, I haven't put them in a monthly expense column. To be fair and accurate on future planning, I should divide those yearly lump sum amounts by 12 and add to the monthly net. Thanks for pointing that out.

 

[Letj]

@Dager, Most Americans do not live on less than $12K. In fact, the medium income is probably more like $50K.

 

[aaronc879]

@Dager, Most Americans do not live on less than $12K. In fact, the medium income is probably more like $50K.

As of 2010, the median income in the US was $29,000. The average is likely around $50,000.

 

[Dager]

@Dager, Most Americans do not live on less than $12K. In fact, the medium income is probably more like $50K.

I was referring to what people spend on food and utilities, not what people gross in total salary. In my area the median is closer to $40k, which nets to about $30k after taxes, of which half is likely allocated to house payments (mortgage or rent), leaving $12k for food and utilities and an extra $3k for emergencies and miscellaneous. I think that's standard for a typical household. I grew up in a household of four and my parents made about $20k salary before taxes (many years ago, so it's not as bad as it appears, though we were still poor). We managed and we didn't eat just scraps.

Thanks for taking the time to comment.