kyounge1956
Thinks s/he gets paid by the post
- Joined
- Sep 11, 2008
- Messages
- 2,171
Well, we live in a small community where probbaly 3/4 of the people are retired. A significant percentage of them have financial problems because the income they retired on is no longer enough to support them comfortably. A few years ago we went to a talk where the FA related to us that he had a lot of clients who retired early----and now had to re-enter the workforce in their late 50's because their plan crashed due to the economy.
We have a neighbor who is a retired airline pilot. He had a generous pension---until the airline went belly-up. PBIC replaced about half of his pension, but PBIC itself is having financial problems. We have other neighbors who have said that if one spouse dies, the other will have problems making ends meet, because they need _both_ SS checks to live on.
I have heard some of the horror stories about what happened to pilots for various airlines. However, I work not for "MegaCorp" but for a local government. Retiree pensions are paid out of a separate fund, not a line item on the City budget, but it is at least theoretically possible for the City not to put in the money it is supposed to, or for the Pension fund to be wiped out. "What happens if the Pension fund goes bust?" is on my list of questions to ask at the "Get Ready to Retire" class, and depending on the answer the Magic Number might get revised upwards.
I have assumed a life expectancy of 100 years. Both of my parents and my two aunts are still living in their mid-eighties, and as I have never married I have no kids to fall back on as a last resort. That works out at a retirement timespan of between 40 and 45 years, depending on the exact date I pull the plug. But I still don't see any circumstances in which I would need $2 million to retire. That amount would support a starting withdrawal which I actually wouldn't need until after ten or fifteen years of inflation, even if I were living entirely on my own savings. If I actually did keep working until I had that much saved, I'd be (at a rough estimate) between 75 and 80 years old, and I wouldn't need that much money to fund a retirement lasting only 20-25 years instead of 40-45.How long are you planning to live after retirement? Maybe you've never made 6 figures in your life (actually, neither have I), but 20 or 30 years of inflation will see the poverty level being 6 figures. For example, when I started my last job my starting salary was $18K/yr. When I retired 29 years later, the starting salary for the same job was $55k.(snip)
Your suggestion boils down to this: ignore defined benefit promises from two governmental entities—both of which have the power to tax, and one of which also has the power to print money—benefits which remain the same (including COLA adjustments) independent of market performance, and continue for the remainder of my life regardless of how long that is. Instead, depend on a personal portfolio which is subject to all the risks you have described, and to others you haven't mentioned. To me, that sounds like a formula for increasing my risk of destitution, not decreasing it. It's true that the Pension fund could go bust, and my Social Security benefits could be reduced or taxed away and the PBGC provide no backup and state pension guarantees fail to take up the slack, all of which would have to happen before I would have only my own savings to live on (and even if all those things did happen, I would still be able to fall back on a reverse mortgage before I started shopping for dinner in the pet-food aisle). I think it's vastly more probable that a self-managed portfolio would be zapped by market gyrations, wiped out my own incompetence (either age-related or just zigging when I should have zagged), or even rendered inadequate by medical advances that result in my living ten or 15 years longer than I expected to.Pension income is money that somebody else is supposed to give to you. It may disappear or be reduced----companies go out of business all the time. You have a right to that money, but they might not be able to pay you. That money is for goodies over and above what you need to live on.
Social Security money is money that the government gives to you, unless and until Congress changes the law. You do *not* have a legal right to receive it. That money is for frivolities. Fill in the frivolity of your choice.
When you are planning for retirement, you really have to account for disasters. In my lifetime the stock market has dropped by nearly 50% several times. There's been periods where inflation pushed the prime rate to 20%, and mortgages to 15%. COLA helps, but never covers it all. Heck, this year there is no SS COLA---yet costs of food, insurance, gas, etc. have all gone up. So what do you do when your SS stays the same but your health insurance goes up $100/mo? I'll tell you what our friends did----she quit her volunteer bookkeeping at the church and got a part time job. He stopped going fishing on weekdays and got a job as janitor.
So......$2m gets you $100K at 5%. When/if that gets cut in half, $1M at 5% gets you $50K.
But if you plan it too tight---like all too many people did in the early 2000's---and have only, say, $300K, when a downturn happens, your income stream dries up.
$2M is a magic number because it's large enough so that it's a virtual certainty that you'd be able to live off of it forever. EVen if things go really pear-shaped, you could take the remaining $1M (after your account gets cut in half), put it in a passbook savings account earning negligible interest, and take out $50K/yr for 20 years.
Want to take on more risk? Start at $1M.
Want to take on huge risk? Start at $300K. Two or three bad years in a row, and you start shopping for groceries in the dogfood aisle. Now that's a repellant thought!