Can I afford to retire?
August 28, 2008 2:28 PM Subscribe
I am 60 years old and thinking of retiring, but unsure about how much money I need to live without working. I have a net worth of $3 million, half of it in two pieces of rental propery with the other half in stocks, bonds and a pension, but live in an expensive area and have a spouse who likes to live well and travel a lot. Can anyone out there offer some good advice?
There's some missing information here, but the things you need to consider are:
1.) How much income do you expect after retirement from your rental properties, investments, pension and social security?
2.) How much do you expect to spend in retirement?
3.) From these two points, is it reasonable to expect your investments to grow faster than inflation?
If so, then you probably have enough to retire, even if you both live a very long time. Here's a very basic calculator:
http://www.banksite.com/calc/retire
posted by justkevin at 2:56 PM on August 28, 2008
1.) How much income do you expect after retirement from your rental properties, investments, pension and social security?
2.) How much do you expect to spend in retirement?
3.) From these two points, is it reasonable to expect your investments to grow faster than inflation?
If so, then you probably have enough to retire, even if you both live a very long time. Here's a very basic calculator:
http://www.banksite.com/calc/retire
posted by justkevin at 2:56 PM on August 28, 2008
See a fee-only financial planner. With your spouse.
Seriously, that's the best way to do this.
posted by Sidhedevil at 3:09 PM on August 28, 2008 [1 favorite]
Seriously, that's the best way to do this.
posted by Sidhedevil at 3:09 PM on August 28, 2008 [1 favorite]
Well, how long do you intend to keep living?
Say you're used to earning $100K a year. Assuming you no longer have any mortgages or other large loans, and have got everything more or less covered, well, you can safely deduct whatever you were paying on the mortgage, car etc., and whatever you were otherwise investing, from whatever you were earning, and there's your figure. You'll need to be securing that much money, every year, for however much longer you intend to carry on. As you grow older, certain expenses (cocaine wifeswap parties) will be superceded by others (Zimmer frames [my dad called his walker "Johnny" - get it?]), and of course there's inflation to take into account, but if you can continue to earn, in retirement, half of what you were annually earning when you were actually working - under the provisio that you have no more major overheads - well, you'll probably do okay.
Your main problem isn't going to be money, anyway. It's going to be "So now what the hell do I do with my day?" Probably you could get a lot of reading done.
Enjoy your retirement! And no, elderly guys don't look good in fake tans, gold chains and open top Ferarris!
posted by turgid dahlia at 3:11 PM on August 28, 2008
Say you're used to earning $100K a year. Assuming you no longer have any mortgages or other large loans, and have got everything more or less covered, well, you can safely deduct whatever you were paying on the mortgage, car etc., and whatever you were otherwise investing, from whatever you were earning, and there's your figure. You'll need to be securing that much money, every year, for however much longer you intend to carry on. As you grow older, certain expenses (cocaine wifeswap parties) will be superceded by others (Zimmer frames [my dad called his walker "Johnny" - get it?]), and of course there's inflation to take into account, but if you can continue to earn, in retirement, half of what you were annually earning when you were actually working - under the provisio that you have no more major overheads - well, you'll probably do okay.
Your main problem isn't going to be money, anyway. It's going to be "So now what the hell do I do with my day?" Probably you could get a lot of reading done.
Enjoy your retirement! And no, elderly guys don't look good in fake tans, gold chains and open top Ferarris!
posted by turgid dahlia at 3:11 PM on August 28, 2008
Disclaimer: IANAFP and IANyourFP.
posted by turgid dahlia at 3:13 PM on August 28, 2008
posted by turgid dahlia at 3:13 PM on August 28, 2008
We really don't have enough info to give you an answer, but this is exactly what financial planners do all day. They will also help you organize things so that you pay as few taxes as legally possible. They'll usually be able to spot any major financial liabilities or inefficiencies that you might not notice yourself.
Here are some things that will be useful for your planner to know, though:
For back-of-the-envelope calculations, the value of your rentals and your personal residence are only worth something if you plan to sell them. Then you have to hope they'll be worth what you hope they are. If you aren't intending to sell, only count in the income you're receiving.
Your medical care will go up. If you don't have Long Term Care insurance yet, it's probably worth looking into. (Statistically, your wife will probably outlive you. Do her a favor and don't use up your net worth paying for nursing home or in-home care, which is going up exponentially these days. I read that, on average, the last 6 months of an American's life costs more than all the medical care s/he received before put together.)
What will you get for Social Security?
Does your pension have a cost of living adjustment? Does it play well with Social Security? Some pensions lessen your Social Security payouts (because you haven't been paying in to Social Security.)
What's your life expectancy? If you're in normal health, take the longest lived person in your family and add 5 years to it. That's usually safe.
What are your expenses (for real- not idealized)?
Are you planning to leave anything for anyone? (In other words, do you want your money/assets to accomplish something after you've gone?)
Do you have trusts set up so you can minimize estate taxes?
Do you have a will? A living will? Do you have medical and financial Powers of Attorney?
IAAFP but IANyourFP.
posted by small_ruminant at 4:07 PM on August 28, 2008
Here are some things that will be useful for your planner to know, though:
For back-of-the-envelope calculations, the value of your rentals and your personal residence are only worth something if you plan to sell them. Then you have to hope they'll be worth what you hope they are. If you aren't intending to sell, only count in the income you're receiving.
Your medical care will go up. If you don't have Long Term Care insurance yet, it's probably worth looking into. (Statistically, your wife will probably outlive you. Do her a favor and don't use up your net worth paying for nursing home or in-home care, which is going up exponentially these days. I read that, on average, the last 6 months of an American's life costs more than all the medical care s/he received before put together.)
What will you get for Social Security?
Does your pension have a cost of living adjustment? Does it play well with Social Security? Some pensions lessen your Social Security payouts (because you haven't been paying in to Social Security.)
What's your life expectancy? If you're in normal health, take the longest lived person in your family and add 5 years to it. That's usually safe.
What are your expenses (for real- not idealized)?
Are you planning to leave anything for anyone? (In other words, do you want your money/assets to accomplish something after you've gone?)
Do you have trusts set up so you can minimize estate taxes?
Do you have a will? A living will? Do you have medical and financial Powers of Attorney?
IAAFP but IANyourFP.
posted by small_ruminant at 4:07 PM on August 28, 2008
I agree with everyone above that you should spend at least a small portion of the money you have accumulated for good professional advice from someone who does not take commission from a financial company.
That said, you can do some very quick and dirty calculations, solely for your own amusement, before you make the phone call to a financial planner.
Foundations that aim to stay "in business" forever, do not draw out more than 4% of funds per year. 4% of 1.5 million is $60,000. That's a conservative draw-out under ordinary circumstances, and may leave a significant estate, if markets go up. But, of course, they can and do go down.
Add to that the net income from your rental properties (subtract taxes, upkeep, and all the other expenses).
Then add your estimated Social Security payments (I assume that you received a statement in the past year) and pensions.
Can you live on that? Do you and your wife want to live on that?
As I said, this is quick and dirty. Don't make any decisions based on this.
posted by ferdydurke at 4:30 PM on August 28, 2008
That said, you can do some very quick and dirty calculations, solely for your own amusement, before you make the phone call to a financial planner.
Foundations that aim to stay "in business" forever, do not draw out more than 4% of funds per year. 4% of 1.5 million is $60,000. That's a conservative draw-out under ordinary circumstances, and may leave a significant estate, if markets go up. But, of course, they can and do go down.
Add to that the net income from your rental properties (subtract taxes, upkeep, and all the other expenses).
Then add your estimated Social Security payments (I assume that you received a statement in the past year) and pensions.
Can you live on that? Do you and your wife want to live on that?
As I said, this is quick and dirty. Don't make any decisions based on this.
posted by ferdydurke at 4:30 PM on August 28, 2008
Have a poke around this early retirement forum for lots of specific advice.
As a VERY rough guide to how much money they recommend you need:
1. You should be debt free with your own home.
2. Your money should be suitably invested in a balanced portfolio.
3. You can withdraw somewhere between 3-5% of the value of this portfolio each year for your living expenses.
So could you live off say $120K a year?
posted by rongorongo at 4:55 PM on August 28, 2008
As a VERY rough guide to how much money they recommend you need:
1. You should be debt free with your own home.
2. Your money should be suitably invested in a balanced portfolio.
3. You can withdraw somewhere between 3-5% of the value of this portfolio each year for your living expenses.
So could you live off say $120K a year?
posted by rongorongo at 4:55 PM on August 28, 2008
A financial planner will cost a few hundred dollars for a one-time visit with a followup after he runs your numbers through his canned formulas. That might seem expensive, but it's a lot more reassuring than collective MeFi advice.
(I love us, really, but I wouldn't risk my nestegg on the green.)
posted by rokusan at 5:05 PM on August 28, 2008
(I love us, really, but I wouldn't risk my nestegg on the green.)
posted by rokusan at 5:05 PM on August 28, 2008
If you put your three million in assets into nice predictable AAA+ investments, you could easily get a 5% rate of return - $150k/year.
So the first question is this: would this hypothetical $150k be enough for you.
Second, the stocks and the rental properties could drop a great deal in value. Could you get by on the bonds and pension alone? If not, you may want to shift your assets from stocks and rental properties into more predictable and stable investments - bonds, t-bills, and CDs.
Why? Because your investment horizon is shorter now, and as you get older, your opportunities to work to earn money will become less common. Both of these make it harder for you to recover from a big short-term downturn in volatile investments.
posted by zippy at 6:39 PM on August 28, 2008
So the first question is this: would this hypothetical $150k be enough for you.
Second, the stocks and the rental properties could drop a great deal in value. Could you get by on the bonds and pension alone? If not, you may want to shift your assets from stocks and rental properties into more predictable and stable investments - bonds, t-bills, and CDs.
Why? Because your investment horizon is shorter now, and as you get older, your opportunities to work to earn money will become less common. Both of these make it harder for you to recover from a big short-term downturn in volatile investments.
posted by zippy at 6:39 PM on August 28, 2008
If you put your three million in assets into nice predictable AAA+ investments, you could easily get a 5% rate of return
No, you can't. 5% is approximately 270 bps over 2 or 3 year Treasuries. No AAAs in the world yield that much. Take for example General Electric bonds with maturities in the next couple of years. They all yield 3%, give or take (I don't want to get overly specific because it gets complicated), and are all rated AAA.
Get your advice from a CFP (Certified Financial Planner). You have WAY too much to lose to take advice from strangers.
posted by SeizeTheDay at 7:06 PM on August 28, 2008
No, you can't. 5% is approximately 270 bps over 2 or 3 year Treasuries. No AAAs in the world yield that much. Take for example General Electric bonds with maturities in the next couple of years. They all yield 3%, give or take (I don't want to get overly specific because it gets complicated), and are all rated AAA.
Get your advice from a CFP (Certified Financial Planner). You have WAY too much to lose to take advice from strangers.
posted by SeizeTheDay at 7:06 PM on August 28, 2008
Seize is right - AAA+ was a poor choice of words - I did not mean to single out AAA+ bonds, just safe investments in general. Seize is also correct that 5% is a high figure - 3 - 4% is more like it now.
The rest of the advice holds. Look at what income you can reasonably expect, and what income you need, and then decide whether the risky parts of your portfolio completely disappearing would still leave you with enough to cover your expenses.
It's not rocket science to come up with a back-of-the-envelope understanding of your financial position, and it's a useful exercise - it will give you a better hands-on understanding of your position and of your needs.
If you get stuck, or if you complete and are ready to rebalance your portfolio, then of course go to a professional.
posted by zippy at 10:32 PM on August 28, 2008
The rest of the advice holds. Look at what income you can reasonably expect, and what income you need, and then decide whether the risky parts of your portfolio completely disappearing would still leave you with enough to cover your expenses.
It's not rocket science to come up with a back-of-the-envelope understanding of your financial position, and it's a useful exercise - it will give you a better hands-on understanding of your position and of your needs.
If you get stuck, or if you complete and are ready to rebalance your portfolio, then of course go to a professional.
posted by zippy at 10:32 PM on August 28, 2008
Because your investment horizon is shorter now
But not THAT much shorter. Each dollar you plan to spend has a different time horizon. The $100,000 you need to live off of next year should be in cash or CDs or something. The $100k you need to live off at age 90 has a 30 year horizon.
Also, depending on what lets you sleep at night (which, imo, is just as important as the math), there are a lot of ideas about the best way to make sure your money lasts. Bill Bengen's study found that not changing your allocation at all as you get older can work just as well as long as you're 100% consistent in taking out only a certain amount each year (a magic number somewhere between 4% & 4.4%).
posted by small_ruminant at 9:29 AM on August 29, 2008
But not THAT much shorter. Each dollar you plan to spend has a different time horizon. The $100,000 you need to live off of next year should be in cash or CDs or something. The $100k you need to live off at age 90 has a 30 year horizon.
Also, depending on what lets you sleep at night (which, imo, is just as important as the math), there are a lot of ideas about the best way to make sure your money lasts. Bill Bengen's study found that not changing your allocation at all as you get older can work just as well as long as you're 100% consistent in taking out only a certain amount each year (a magic number somewhere between 4% & 4.4%).
posted by small_ruminant at 9:29 AM on August 29, 2008
Also, regarding rate of return- it needs to be that much above the rate of inflation. If you're making 3% and inflation is 3% you're not getting ahead.
posted by small_ruminant at 9:30 AM on August 29, 2008
posted by small_ruminant at 9:30 AM on August 29, 2008
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All that said, congratulations on doing such a good job of saving. You should be able to live easily on the proceeds, but it all depends on how well you want to live, and how the markets do.
posted by Clyde Mnestra at 2:46 PM on August 28, 2008