How much is enough to retire early on?

[DallasGuy]

My question is: Do I have enough savings/investments to retire on?

I know it's very specific to each individual, but I'd just like a few opinions on my situation.

I'm single, 51 years old, have about 1.2M in savings/investments with about 2/3 of it invested in cash investments (yes, I know this is probably too much in cash at my age, but I can sleep at night, so I don't want to discuss this part...I know the pros and cons of this) and the rest invested in individual stocks (not that much) and mutual funds. My house is paid off, I have no debt, I live in a fairly low cost area (Dallas, TX), and my yearly cost of living is about $30,000. This cost of living includes paying for all of my insurance (health, auto, house, etc.), taxes, 2-3 trips a year as well as all other living expenses. I'm guessing I could probably increase my spending to about $40,000 if unexpected expenses arose with little trouble. Compared to most people I'm guessing I live pretty cheaply and don't feel like I'm suffering at all. From all of the retirement calculators I've run the numbers through, I "appear" to be safe in taking my my early retirement now.

What is your gut feel? Is early retirement a fairly safe bet for me at this point? Thanks in advance for any opinions.

 

[retire@40]

 

[Callie]

I agree, looks good. You can always work PT if you feel you want some more cash. That is what we plan to do.

 

[Sheryl]

If you're able to cover your own health insurance within that $30,000 I say go for it, too!

 

[lazygood4nothinbum]

how much is enough? apparently it is 30% less than i thought i would be. now where'd i put that plane ticket to thailand?

 

[maddythebeagle]

Funny how ever so often somebody posts a thread saying they have a boatload of cash investments and "Am I in good shape? but I DONT want a response about having so much cash?"

 

[FIREd]

I think you would probably be OK, but I worry that you are still young and with 2/3 of your portfolio in cash, you won't be able to keep up with inflation. But according to FIREcalc, it looks like you'd be OK as long as you don't spend $40,000 for the next 40 years (although the standard FIREcalc may use bonds instead of cash as the fixed income portion of one's portfolio, so it could impact the result. Does anyone know about that?)

 

[DallasGuy]

Funny how ever so often somebody posts a thread saying they have a boatload of cash investments and "Am I in good shape? but I DONT want a response about having so much cash?"

Since you brought it up...here's my logic on the whole "Cash vs Stock investments issue"....

Let's say I put 66% of my money in cash and 33% in stocks (my actual mix of investments right now). With cash I can get a guaranteed 5% (I'm actually getting more right now) and lets say over the years I average 8% on my stock investments. When you add those returns together I get 5.94% (5 X .66 + 8 X .33).

Now, lets say I put 66% of my money in stocks and I get 8% on that....and then I put 33% of my money in cash at 5%, I get a 6.93% return combined (8 X .66 + 5 X .33). NOTE: I can already guess that you're thinking that most people go higher than 66% in stock investments....but if you really want to live off of that and be sure it's going to last in retirement, would you really go higher than that?

The difference is about 1% (6.93 - 5.94). I would get about a 1% higher return by having twice as much of my money in a much riskier investment. For ME, it's not worth it. For you, it might be. And perhaps you regularly average much higher than 8%...if you do, I'm happy for you. As I said in my original posting, I know the pros and cons of having too much cash. Each individual investor has to pick the right mix of investments where they feel they can sleep at night AND have a good chance of making the money last. I can tell from your post that you feel by putting so much money in cash you don't think my money will last. It's a calculated decision I've made.

Also, I knew people that were 100% invested in stocks/mutual funds prior to the tech bubble bursting and it took them 5-6 years to get back to where they were prior to the bubble bursting. What if that were to happen right before I decided to take early retirement? I don't think I want to go back to work again after retiring.

Anyway, I totally understand where your comment is coming from, but my question actually was...given "MY" situation, can I expect to have a fairly safe early retirement? If you think not, just say so. I appreciate your input regardless.

 

[firewhen]

If you split the difference and say your expenses would be $36,000 per year, that would be a 3% withdrawal rate in a mostly cash portfolio. Figuring 3% inflation, you would need to earn 6% on your portfolio for the rest of your life or you would start to erode the purchasing power of your withdrawals, even if the nominal portfolio continues to grow. 6% should be reasonable, but we have had long stretches in both the 90's and 2000's when that was less so. Not that long ago people were getting 4% on 5 year CDs.

What could do it for you is social security. Depending on your payout, it could supply half your expenses. So in a dozen years, you might only need to withdraw 1.5% from your portfolio and only need 4.5% to cover that and inflation. You also have the equity component, which should help the return for the long haul. Looks to me like you can do it, but you will need to watch it.

Even though I am a big believer in stocks, I see where you are coming from. The presumed extra return on stocks is not enough for you to risk your lifestyle should we have a prolonged downturn or period of low returns. Do remember that cash returns are not guaranteed either over decades, though your principle should be safe.

 

[old woman]

My question is: Do I have enough savings/investments to retire on?

I know it's very specific to each individual, but I'd just like a few opinions on my situation.

I'm single, 51 years old, have about 1.2M in savings/investments with about 2/3 of it invested in cash investments (yes, I know this is probably too much in cash at my age, but I can sleep at night, so I don't want to discuss this part...

Remember cash has risk too. My mom retired 20 years ago banks were paying high interest rates and all her money was in CDs paying 8% or more. Within a few years CDs were paying more like 2%. When long term investing your money you must account for inflation so if you get 5% and have 3% inflation you are only getting about 2% to live on, if rates fall to 4% it cuts your income in half after inflation.
If your home is paid for and your property taxes and insurance are low you might not be so affected by inflation but you have about 40 years to live and at some point will want a new car and a new roof. How much will a roof cost in 20 years? You are paying for insurance when you are young and healthy what happens if you get an expensive condition like diabetes?
Quitting work now will cut into your SS earnings so cut the benefit since they average your highest 35 years you will have zero years and some young not earning much years so about half the earnings of someone who had 35 solid years of earnings.
You might have enough but you might not find out you don't until you hit a major medical issue or home repair bill. You might find yourself looking for work just when your health fails and with no recent work experience.
I you keep a foot in the work world something like temp work or seasonal you can avoid spending your lifesavings as quickly and get back to work if needed.

 

[OAG]

If you can cover your expenses with money to spare to save (buy more CD's?) I say GO FOR IT.

IMO I see nothing wrong with ALL CASH. Personally my return is locked in at about 6% for the next 7 years (7 and 10 year FDIC insured CD's). Been doing that for about 25 years without a problem. Frankly, I really do not see the need for Stocks or MF just to get "maybe" 3-5% more over the same 25 or so years. No dog food yet!

 

[dex]

Agree

 

[Spanky]

IMO I see nothing wrong with ALL CASH

.. if and only if one has a lots of cash since its return is barely keeping up with inflation.

 

[Bigritchie]

All cash here myself also.

I will actually save a big chunk of the cash from interest most of the time, and with more cash each year churning interest, pretty sure every thing will be ok.

 

[Telly]

Heavy cash position. Ah yes ah yes...

1979 CPI = 13.3%
1980 CPI = 12.4%

I remember it well... buy it today, 'cuz the price goes up tomorrow, more next month.

BTW, the S&P 500 returns those two years were 18.4% and 32.4%, respectively. But a typical bond fund was only ~3%.

 

[SteveR]

We all need to do what works best for us. For some it is the knowledge that your cash is stuffed in a CD mattres for future use. For others, the thought of all cash would be unimaginable.

There only right answer is what are you more comfortable with AND what risks are you willing to take for that level of comfort. Inflation will eat into cash account faster than you can imagine. Historical stock market returns have been around 8-10 % on average over the past several decades; but, some years are down years and with those come a loss in your value but not until you sell. Inflation will hit your cash forever.

My mother is from the Depression and trusts neither banks nor the stock market. Her small holdings are not helping her much but are managing to stay up with inflation. She is happy they are conservative and as long as they keep making money for her I am OK with it. Not my cup of tea but it works for her. BTW, I am about 60 % equities and were it not for them I would not have been able to ER.

 

[Geoffrey]

I plan on retiring in 11 months (at age 59) and I estimate I will have about $1.4M, nearly all in cash (only about 5 % equities). Yes, I realize that equities historically have a substantially better return, but I place a very high value on sleeping well at night. I can generate enough income from my nestegg, a small cola'd pension ($20K), and Social Security to take care of all of my material needs for as long as I am likely to live. So, what is the point of assuming the additional risk? Substantial exposure to equities works for some, but it is not for everyone. Besides, I tend to believe that equities will disappoint going forward, at least in the short to medium term, so I feel very comfortable with my cash position. Perhaps one of these days they'll be holding a fire sale in equities . . . I should be well positioned to back up the truck if and when that happens.

 

[Mysto]

If you are really worried about sleeping at night - you could buy an cola'd lifetime annuity from Vanguard for about 700k for your 30k a year and then invest the rest. (Recognize there is a risk of default and a cola cap)

Historically, just cash, will not keep up with inflation. The earlier you retire the greater the risk and with our national debt - the risk continues to grow.

 

[OAG]

Telly: Why be selective? Average Inflation as measured by CPI for last 27 years is 3.82% (which includes the 2 years you mentioned). For the last 20 years it has averaged 2.975% (Call it 3%).

Mysto: Over the last 27 years Total Inflation has been 103.9% (annual average of 3.82%) while my CD invested savings has INCREASED 145.9% (annual average of 5.40%) with a current annual return of 5.7%.

SteveR: So if the average is 8-10% (probably for one starting out in the last year closer to the lower number if not below that). So if one has enough, which the OP seems to have, to cover expenses why take the risk for the additional 2.6% (or so)?

Mysto: I have 2 of those too. One is called Social Security and the other is Military Retired Pay. So I sleep very soundly every night. The recent Stock Market antics are just PURE entertainment for me. I just cannot see getting involved in something that is so out of control for the average person. Poker is gambling but at least you can play your hand, and if you can count to 52, maybe you can figure out what everyone else could be holding.

Geoffrey, and others, make the point very well. Nice to know the CASH population, if small, is present which helps to make this forum enjoyable.

 

[HFWR]

Would you buy a pharmacy? How about an gas station? Plumbing business? Grocery store?

I buy stocks - well, actually index funds - to invest in a business, or in my case, several hundred businesses. I do not consider it any more of a "gamble" than starting/buying any other business...

And, btw, if you're money is in CDs, you are in the "business" of loaning money.

But, to each their own.

 

[Rich_by_the_Bay]

If one's only concern is conservation of buying power for life, why go cash instead of TIPS?

 

[digimix]

I am only 33 years old and have a clear plan to retire early. Currently my portfolio is 50/50 cash / real estate. My cash investment I have receive 10% monthly for the last 2 years. I am only sorry I did not start this like 5 years earlier. But I am extremely happy with how things have been going. I plan to retire in Panama where the cost of living is dirt cheapo as I already have a condo there. I travel a lot and these investments generate enough to live on and to afford me the lifestyle I want and at the same time still save 75% of my income(all passive) after these expense. My take is, calculate your current income, multiply it 5 five times and if you can invest your way to generate that amount then step off the boat and take the dive in retirement enjoy life while you have the strength to. Why save up your money only to spend it on an old unhealthy you when you can enjoy your youth while still saving to protect your old age.

 

[FIREd]

Wow I am very surprised by the number of early retirees on this board with massive cash positions. It goes against everything I have ever read on the subject, yet it seems to work! Just out of curiosity, for those of you with at least half their portfolio in cash, what is your SWR (or planned SWR)?

Mysto: Over the last 27 years Total Inflation has been 103.9% (annual average of 3.82%) while my CD invested savings has INCREASED 145.9% (annual average of 5.40%) with a current annual return of 5.7%.

R Wood, It sounds like over the past 7 years the real return on cash has been about 5.40%-3.82% = 1.58% on average. Has this been your average withdrawal rate for the past 27 years and has your nest egg kept up with inflation, meaning did it grow on average 3.82% a year over the past 27 years?

 

[rmark]

sleep?

The withdrawal research centers on 60/40 market portfolios, 25 year withdrawal periods, and U.S. historic returns and volatility – arriving at 4% of initial portfolio value + annual inflation withdrawals. Lower & higher starting withdrawals for longer & shorter periods.

Some authors overweight past higher return assets or devise complicated withdrawal rules in attempts to raise withdrawal rates. However, these rules are typically based on short segments of market history, making their future value questionable. And even the generally accepted 4% + inflation is weak when tested against other capital markets.

In essence, the research has you dividing your initial portfolio over your initial life expectancy while maintaining a market weight portfolio, using higher equity returns to offset stocks higher volatility, thus providing for an inflation adjusted withdrawal.

As a single 51 year old male you probably have a life expectancy of about 35 years.
(my guess, see IRS publication 590 for a more accurate number). Your 1.2 million divided by 35 years gives a 34,000 starting withdrawal from which investing costs and taxes would be deducted, leaving actual spending. If you keep the high cash/fixed income allocation, I’d suggest just re-dividing your portfolio each year using a new life expectancy estimate, resetting your withdrawal annually. This by itself will lead to increasing withdrawals, (as you are expected to live a longer shorter timeJ) though without the supposed inflation adjustment. Eventually it leads to a late life spend down of your portfolio.

You may find that your fixed income generates more cash flow than this withdrawal calls for, which may be re-invested into your portfolio or you may wish to increase your equity allocation.

As an aside – I know of no withdrawal research based on retiree sleep patterns.

 

[OAG]

Firedreamer: Our current SWR rate is 0% as we have been able just let it grow. My Army Retired Pay was all we used to live on until Social Security came along in 2000 (DS started) and 2002 (I started). In 2008 we will start RMD from Traditional IRA (DS) and in 2011 (myself) both of which are earning 6.25% APY until 2014 when they will be rolled over. These three sources will provide all of our expenses and then some. We also have small ROTHs earning the same 6.25% through 2014 which we do not plan to use and let them be available as a last resort. Sometimes we actually do withdraw from the savings but only to purchase big ticket items like a new car or when we purchased our personal residence, both of which were bought in 2005 utilizing maturing CD's. Since that time we have replaced the dollar draw downs that occurred with those two purchases. These purchases are not too large as we have been able to roll over a previous residence to a new one and the previous vehicles trade in value gets rolled to the new vehicle.

Just to be clear I have invested in Mutual Funds in the past but only for about 5% or less of our "nest egg" at the time, but I got really tired of watching the up and down of the market so we got out (luckily just before the 2000 (I think it was 2000)) drop -- always made money at it but we just felt more comfortable being 100% in insured savings. Also back in the late 70's and early 80's I did do some second trust mortgage lending at 21.25% interest rates. Fortunately, all of my second trusts did either go to maturity or get paid off early with no defaults. Also did a couple of good callable Bonds in the same time frame with attractive rates but they all got called early when the interest rates started to fall.