Retire a Millionaire without a Million Bucks

[Eagle43]

This sparked by an article of Paul B. Farrell in local paper where he states that if you have $50,000 coming in annually, in the form(s) of savings, pensions, Social Security, Lower home costs, and a part-time job (if necessary or just simply wanted), you have the equivalent of a million invested with a 5% return. His theme is that a successful retirement (financially) is cash flow. Period. So any Wall Street Pro telling you that a million is necessary is high-priced baloney.

BTW You may have covered this already somewhere else. If so, Brother Farrell's point-of-view should be a confirmation; at least I believe him.

 

[Berkshire_Bull]

No doubt it's cashflow, but cashflow from investments is irregular. A cash pile is nice, and at times a neccessity.

 

[wabmester]

The problem with looking only at cash flow is that it doesn't consider inflation.    You might be happy being a "millionaire" now, but 40 years from now, you'll feel like a pauper.

 

[MJ]

To add to wabmester point;

Based on my conservative inflation, the $55k yearly expense/tax I will need today, will grow to over $250k in 40 years. That is with reduced expenses, 50% less travelling cost, cancelled LTC, no auto, lower food bills (no teeth ha ha) etc.
For my health expenses, I factored in 11% inflation, which might be too low.

$1mm for me is a bottom total and a bit iffy, as I will still be relying on SS and medicare.

MJ

 

[retire@40]

Yup, in 40 years your $50K will be worth $15K assuming 3% inflation. I'd rather have the $1mil today and live on $40K a year adjusted for inflation.

 

[Bob_Smith]

I believe John Greany took a look at this issue in his online book, at least indirectly. If memory serves, one would have needed to sock away a little less than half of a non-cola'd pension, and invest it in a sinking fund to keep pace with inflation during the worst 30 year period to date (1967-1996). Something like that...

 

[JOhn Galt]

With our meager pile, runaway inflation would cause
dramatic scaling back. Fortunately, we are psychologically able to do it if necessary. OTOH, we might get lucky and die before the money runs out.

JG

 

[Shredder]

I believe John Greany took a look at this issue in his online book, at least indirectly. If memory serves, one would have needed to sock away a little less than half of a non-cola'd pension, and invest it in a sinking fund to keep pace with inflation during the worst 30 year period to date (1967-1996). Something like that...

If you had a pension AND a IRA/401K then you should be fine with pension as cash flow and investments as inflation hedge and wealth building, as long as it's not raided too early. Most of us here are the type to LBYM so we would do well either way I think. Shredder

 

[Eagle43]

The problem with looking only at cash flow is that it doesn't consider inflation.    You might be happy being a "millionaire" now, but 40 years from now, you'll feel like a pauper.

Forty (40) years from now, I'll be 101 going on 102.

 

[wabmester]

Forty (40) years from now, I'll be 101 going on 102.  

I'm sure most of us hope that we'll have gracefully exited by that age, but the average lifespan keeps on increasing. The maximum lifespan for those alive today is thought to be around 120 years old.

A lot of us retired early by being conservative. And that's also how we found this board -- by researching worst-case outcomes so we could prepare for them. Just food for thought -- but your cash flow scenario sounds more like preparing for the best-case rather than the worst.

 

[Bob_Smith]

If you had a pension AND a IRA/401K then you should be fine with pension as cash flow and investments as inflation hedge and wealth building, as long as it's not raided too early. Most of us here are the type to LBYM so we would do well either way I think.    Shredder

Hi Shredder. If I had a $50,000 pension in nominal dollars (I wish), I'd probably view it as equivalent to roughly a $25,000-$30,000 cola'd pension. So, like some of the others here, I'd take the million.

 

[Shredder]

Hi Shredder. If I had a $50,000 pension in nominal dollars (I wish), I'd probably view it as equivalent to roughly a $25,000-$30,000 cola'd pension. So, like some of the others here, I'd take the million.

Even with free health care and a tax defered account to draw on after inflation does it's thing, would you then take the million? Thats my situation now, I'm 50 yr old have a pension (not 50,000 though), may get SSD, have free health care, have a 401K and a IRA that won't be touched till around 60ish. I think I'd rather have that than a cool million.........Shredder

 

[mark]

Typical near 0% net real return while retired, with average 3% inflation and 1% net real return on reinvested fixed income, simply divide fixed income and portfolio annually over remaining IRS joint life expectancy, reinvesting unspent fixed pension into portfolio.

Rising interest rates lower current investment values, reducing portfolio withdrawals, while invested fixed income cash flow helps rebuild portfolio at the now higher expected return.

IF the net real return tends to increase with inflation, this formula should work over a wider range of single digit inflation rates.

 

[mark]

Note the capitalized 'if' in the end sentence. Henry Hebeler over at analyzenow.com suggests a similar idea in the book he wrote for J.K. Lasser.

 

[Bob_Smith]

Even with free health care and a tax defered account  to draw on after inflation does it's thing, would you then take the million?  Thats my situation now, I'm 50 yr old have a pension (not 50,000 though), may get SSD, have free health care, have a 401K and a IRA that won't be touched till around 60ish. I think I'd rather have that than a cool million.........Shredder

I was speaking about the the original post - the notion that a $50,000 pension is the equivalent of a million.