Burns: Every $1 you do not spend = $50 invested

[mickeyd]

http://www.dallasnews.com/sharedcon...ns/2006/stories/072006dnbusburns.159f94d.html


The power of your personal decisions is enormous. Every dollar of spending you avoid eliminates sales taxes and income taxes.

Follow this trail. An item priced at $1 will cost $1.075 with a typical sales tax. To net $1.075 after a 15 percent federal income tax, you need to earn $1.26 on your investments. At a safe withdrawal rate of 4 percent, that means you need $31.61 in investments to support every $1 of retirement spending.

If you happen to trigger the taxation of Social Security benefits or live in a state with an income tax, the investment multiple you will need can be much higher.

A retiree who triggers the worst possible rates will need to earn $2 on his investments to generate $1.075 of after-tax income to buy something that costs $1.

Every dollar you don't spend eliminates the need for $50 in investments.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

I have never seen this aspect of expenses/investments/savings quantified before and I have held this position for many years, I just could never figure out how to do the calculations.

 

[Cut-Throat]

Yes and this is why after a down market year, reducing spending is a powerful tool to ensure portfolio survival.

 

[ERD50]

Every dollar you don't spend eliminates the need for $50 in investments.

I can't help but think that my wife will turn this logic around on me:

'Gee honey, I spent $100 less last month like you asked. Can I have the $5,000 I saved now?'

-ERD50

 

[Ed_The_Gypsy]

Please, let us not go there. It is a bad week for jokes like this.

 

[jeff2006]

Every dollar you don't spend eliminates the need for $50 in investments. [/i]

Unfortunately, Burns was more than a little sloppy on this point.  It's not per-one-dollar that you spend.  Rather, it's per one dollar per year, recurring every year for the rest of your life.  So nothing like $50 is eliminated by not spending one dollar one time.

 

[Delawaredave]

We're still working. I try to look at expenses on a "pre tax basis" - what do we need to earn to net a certain expenditure.

Better yet to look at "what do I need to save" to support an annual return to cover an expense.

Years back Buffett's wife bought new furniture - apparently around $5,000. He made the point that the furniture really cost $20,000 -- the growth potential of $5,000 over 10 years at 15%

 

[azanon]

Unfortunately, Burns was more than a little sloppy on this point. It's not per-one-dollar that you spend. Rather, it's per one dollar per year, recurring every year for the rest of your life. So nothing like $50 is eliminated by not spending one dollar one time.

Good point. Did Burns print that? That was definitely a mistake.

 

[ladelfina]

Years back Buffett's wife bought new furniture - apparently around $5,000. He made the point that the furniture really cost $20,000 -- the growth potential of $5,000 over 10 years at 15%

Geez.. yeah, well there is a limit..
For a mega-multi-billionaire to bitch about $5k of furniture is like a regular guy bitching about...?

"Honey, I can't believe you bought that Kraft Mac & Cheese for supper!! In 10 years that .89 could be worth $5.00.. are you trying to bankrupt us?!?"

 

[ERD50]

Good point. Did Burns print that? That was definitely a mistake.

Not so much a mistake, what he said is correct - but his lack of emphasis certainly could lead to someone 'hearing what they want to hear'.

His numbers are actually fairly close to the 4% SWR guideline. 4% is 25x spending, he uses 30 to 50x, but it is after-tax spending. Same ballpark.

-ERD50

 

[Leonidas]

Years back Buffett's wife bought new furniture - apparently around $5,000. He made the point that the furniture really cost $20,000 -- the growth potential of $5,000 over 10 years at 15%

Warren knows the value of money and he's not one given to wasting it on frivolities. But his idea of LBYM is a little different than mine. I read somewhere a few years ago that his house still has shag carpeting in it.

 

[astromeria]

his house still has shag carpeting in it.

30-year-old shag? dust mite fiesta!

 

[HFWR]

Shagadelic... 8)

 

[mickeyd]

It's not per-one-dollar that you spend. Rather, it's per one dollar per year, recurring every year for the rest of your life

I'm not sure I agree Jeff. If I were say 20 years old (don't I wish) and was saving until my retirement at age 70, $1 per year ($50) does not work.

I do agree with ERD50's statement of

His numbers are actually fairly close to the 4% SWR guideline. 4% is 25x spending, he uses 30 to 50x, but it is after-tax spending. Same ballpark.

and think we are only refering to a single dollar ($1) in a single year.

 

[mickeyd]

Shagadelic...

Oh, BE-HAVE...

 

[SteveR]

So,
According to Burns...if you are really well off with a very high income in a very high income tax state and you trip the SS income tax and you are in the over 15% Fed. tax bracket you would need $50 for every dollar you spend annually while in a 30 year retirement based on the usual assumptions about needing $25 for every $1 spent annually while in retirement.

That seems to be on the fringes of reality for most folks. Maybe the top 5% of folks who can generate the kind of retirement income that would put one into a very high tax bracket would ever really experience this amount of tax. It just seems like a real stretch to me to double the amount needed to generate an after tax income.

I have always figured taxes as part of my expenses since the expenses must be lbalanced by some form of income. Once I know my expenses I can then determine the amount of income needed to fund them. Then I can add the tax on top to see the "real" income needed to fund all of it. In no case is it double my pre-tax income stream even if I really crank up the income levels. 30% higher but not 50%. Am I missing something here?

 

[sgeeeee]

. . .  Am I missing something here?

Yeah. Burns is still working and he had a deadline.

Actually, I really respect Scott Burns and like reading most of his articles. But if you have a recurring deadline, you have to publish some stuff that just isn't as good. There may be some very wealthy retirees who need $50 for the last incremental dollars they spend in a year, but I don't think it applies to everyone or even every dollar.

 

[Cb]

I think the "$5000 spent on furniture story" was actually told by Jim 'Investment Biker" Rogers, a bright enough guy, but MUCH different than Warren Buffett.

Cb

 

[HFWR]

Warren probably OWNS a furniture company (or two)...

 

[SecondCor521]

I have always figured taxes as part of my expenses since the expenses must be lbalanced by some form of income. Once I know my expenses I can then determine the amount of income needed to fund them. Then I can add the tax on top to see the "real" income needed to fund all of it. In no case is it double my pre-tax income stream even if I really crank up the income levels. 30% higher but not 50%. Am I missing something here?

You might be missing sales tax on the item if it's subject to sales tax in your state.
You might be missing federal income tax, state income tax, SS tax, medicare taxes on the income.
Not to mention the additional expenses and time incurred to earn the money that you pay those previous four taxes on before you pay sales tax before you get your item. See YMOYL by Domiguez and Robin.

In my case, let's say I earn $2.00, of which I spend 10% of my earnings and time to get, so that takes it down to about $1.90. SS tax is 6.2%, Medicare is 1.45%, state is 8%, feds are 25%, for a total of 40.65%. That leaves me with $1.13, which is enough to pay my state sales tax on a $1.00 item with about a nickel left over. Those of you with higher state taxes, higher incomes, or long commutes probably have it worse, so I'd say Mr. Burns is right on the money.

2Cor521

 

[spideyrdpd]

I have always looked at it the other way around. Save a dollar today and invest it and make it 2 dollars by the time I retire.
Which would make the guy right .
Although he did say that the $50 was the worst possible scenario, I have to wonder if he factored in the Bush effect. Then theres the threat of Hilary coming to office. Pushing her health benefits for all. Someones going to have to foot the bill.
Rob

 

[Nords]

Warren probably OWNS a furniture company (or two)... 

Yeah, a few: CORT Business Services, Nebraska Furniture Mart, R.C. Willey Home Furnishings, Star Furnishings, and whatever's buried in the hairball of Scott Fetzer Companies.

The full list & links: http://www.berkshirehathaway.com/subs/sublinks.html

 

[SteveR]

You might be missing sales tax on the item if it's subject to sales tax in your state.
You might be missing federal income tax, state income tax, SS tax, medicare taxes on the income.
Not to mention the additional expenses and time incurred to earn the money that you pay those previous four taxes on before you pay sales tax before you get your item.  See YMOYL by Domiguez and Robin.

In my case, let's say I earn $2.00, of which I spend 10% of my earnings and time to get, so that takes it down to about $1.90.  SS tax is 6.2%, Medicare is 1.45%, state is 8%, feds are 25%, for a total of 40.65%.  That leaves me with $1.13, which is enough to pay my state sales tax on a $1.00 item with about a nickel left over.  Those of you with higher state taxes, higher incomes, or long commutes probably have it worse, so I'd say Mr. Burns is right on the money.

2Cor521

I believe you may have missed part of the point of the article and my reponse to the OP. We were discussing income after retirement not wage income. SS, Medicare and higher Fed. and State taxes are not part of the equation. In my example I figured in sales tax of 7.5%, state income tax on non-wage income, and Fed. tax on non-wage income. My example would have the figure much closer to $1.30 than to $2.00 for investment income needed to offset spending including sales tax and Fed. and state income tax based on being retired with an average income. Commuting and any other w*rk expense would not enter into the calculation since it is not relevant to a retiree.

In your example you are correct. A job costs you more than being retired in relation to income related costs associated with creation of wage income.