How much money would I need to live in the U.S. without having to work for the rest of my life?

October 8, 2007 3:15 PM

How much money would I need to live in the U.S. without having to work for the rest of my life?

I would like to live in an average-living-cost city (not NYC or LA for example), have a decent middle class life, with a fully paid house, switching cars every 3 or 4 years, and my monthly income would come from investments. How much money would I need to amass before beginning to have such lifestyle?

Important info: I'm 30 years old now, so let's say I have such money by my 40s so I would live some 25 to 30 years as a retired man living from interests. In the 70s, I think one million dollars would be enough, but I'm well aware that this is not enough money in 2007.

O! hive mind, guide me on how to retire early!

posted by dcrocha to work & money (48 comments total)

I think it would be easier if you were to set a standard based on an approximate annual pre and post tax spend. Middle class means a variety of different things to different people in various areas of the country. As expensive as New York and LA are, you can spend just as much money in Seattle, Phoenix or Denver (Boulder). If you want a rural life, you might be able to stretch it out further.

I would first target a geographical area, and then determine whether you want to rent an apartment or own a house, and then add in all the amenities you are looking for. Not knowing any of that, your annual nut could range anywhere from $25,000-80,000 per year or more. The amount you'd need to have saved up in order to finance that type of lifestyle, could accordingly, vary considerably.
posted by psmealey at 3:19 PM on October 8, 2007

Why couldn't $1mil work, if you just had it sitting around in cash? If you figure a 10% return, you're making a fine income, though it may be slightly scant of getting a new car every 4 years.
posted by craven_morhead at 3:25 PM on October 8, 2007

Replacing your car every 3-4 years is extreme, isn't it?
posted by Mikey-San at 3:29 PM on October 8, 2007

$1 million would be $50,000 a year before taxes, assuming 5% on top of inflation.

To calculate your yearly pretax income, calculate

(Amount You Want)/(Percent Return)

e.g., If you want $80,000 a year and think you can get 6% returns, you need 80000/.06 = 1.3 million in the bank.
posted by null terminated at 3:30 PM on October 8, 2007

More info then: I would like to live in a 3-bedroom house, fully paid (no mortgage for God's sake), a swimming pool, 100 to 200 miles from the beach, a decent car (nothing too fancy like a Lexus), normal monthly spendings for a family of three (wife + kid), one or two international trips a year, some money to take courses on things I enjoy such as literature, finance, political science, etc.

I don't live in the U.S. but let's say some candidate cities would be Orlando, Sacramento, Philadelphia, etc.

Does that help? :)
posted by dcrocha at 3:31 PM on October 8, 2007

If you can find a way to guarantee 10% return, dude, you'd pretty much be the most incredible investment manager EVAR.

I would argue that you'd need $1.5 million to $2.0 million in the bank right now to be able to live comfortably for the rest of your life. This assumes that your house is already paid for. It's tough to really hope for more than 5-7% guaranteed forever. Because sure, some people made 30-40% for the last three or four years, but if these people were still in the market back when it crashed, they probably got half of their investments wiped out (of course, this is all dependent upon your investment theories, but let's be honest, no one beats the market consistently forever).

Basically, $2 million at 6% would yield $120K/year pre-tax. Sound like a lot, except that inflation is 2-3% a year, which means that in 20-30 years, a million dollars is worth half as much as it used to be. So you get extra income now to store away because your cash is worth less in the future.

Comfort is the key, though. If you were more specific about how much it currently takes to make you comfortable, a better number could be derived.
posted by SeizeTheDay at 3:33 PM on October 8, 2007

you're making us do all the hard work! only you can figure out how much you need to make you comfortable. You're 30 years old, you should have that figured out by now.

Then, assume a 6% rate of return, and figure out how much money it would take to get that in interest ever year.

Then, be sure to account for inflation (2%) a year.

Finally, since you want your house paid off, figure out how much the house would cost and just add it to the figure you previously derived.

viola.
posted by unexpected at 3:50 PM on October 8, 2007

So it sounds like you're looking for an amount that would cover the full cost of a fairly nice 3-bedroom home, new Lexus every 4 years, tuition and expenses for a kid, and vacation trips on top of normal living income. For that, you'd need the high end of SeizeTheDay's $1.5-2mil figure. The example cities you listed aren't the most expensive but they're not exactly cheap either.

No offense but if you're looking to make this amount through investments, I think it would be wise to learn how to perform this type of calculation on your own.
posted by junesix at 3:54 PM on October 8, 2007 [2 favorites]

Previously.
posted by anaelith at 3:58 PM on October 8, 2007

Hi Junesix,

Perhaps I'm still not very clear in my question.

I live in a country other than the U.S.. I know exactly how much money I'd have to make before I could stop working and :

1) Buy a decent house at a not-so-expensive place.
2) Switch cars every 4 years
3) Invest in such a way I could guarantee a decent yearly return to help me live from interests/dividends.

I actually don't plan to start making all that money from investments only right now. I know I will have to work hard for the next years AND do well in investments just to have the money to get started with my plan. THEN I would live according to my plan, but this would include a move to the U.S., where: inflation is lower, houses are expensive, cars are cheap (at least compared to my country), stock market returns aren't that good since the market as a whole is more stable (i.e., companies are more perfectly priced), education is expensive and so on and so forth.

With that said, any more tips? :)
posted by dcrocha at 4:01 PM on October 8, 2007

@myself

I live in a country other than the U.S.. I know exactly how much money I'd have to make before I could stop working and :

correction:

I live in a country other than the U.S.. I know exactly how much money I'd have to make IN MY COUNTRY before I could stop working and:
posted by dcrocha at 4:03 PM on October 8, 2007

Be warned that some of the advice given here is dangerous.

For example, simplistic interpretation of "10% returns".

An average long-term return on 10% is not out of the question. For example, if you had plopped your money in a tracking fund for the S&P 500 back in 1969, you would have averaged over twelve percent per year, to this point.

However, to take that fact and assume that you will make 10% (or whatever) per year is very dangerous.

First of all, "average" is not all there is to the situation - not by a long shot. The markets fluctuate very wildly; if you actually withdraw 10% a year to live on, counting on the fact that on average you will make 10% per year, you stand a very good chance of going broke.

Second of all, even if you somehow miraculously find an investment with a guaranteed ten percent per year, withdrawing ten percent will still make you broke. Inflation will drive you down to poverty.

Finally, keep in mind the aftereffect of the worst case scenario: Your investments have gone bust. What do you do now? You go back to work.

With job skills that are woefully out of date, and with a gaping chunk of time missing in your resume.

Good luck.

Now, I want to explicitly say that I am not qualified to give financial advice, and that you should take everything I say with a grain of salt. With that said, however:

If you invest conservatively (e.g. S&P tracking), I would consider you foolhardy if you withdrew more than 4% of your nest egg in any given year, and even that I would consider risky.
posted by Flunkie at 4:14 PM on October 8, 2007

another previously
and, similar
posted by LobsterMitten at 4:15 PM on October 8, 2007

There are plenty of retirement calculators out there. Google is your friend.
posted by randomstriker at 4:17 PM on October 8, 2007

The reason people are having trouble answering your questions is because they have different opinions about what a "normal" month's spending would be.

Basically what you want is a retirement calculator, but with the years in retirement lengthened dramatically. Like randomstriker said, you can find retirement calculators all over the web. Yahoo Finance, Bloomberg, etc.

Personally I think you would need at least $2 million dollars to even be close to be able to do what you would want. Buying the house and cars, would require a couple hundred thousand in startup costs, and then you need to maintain that.

The prior threads linked to by LobsterMitten are exactly what you want.
posted by bove at 4:25 PM on October 8, 2007

And switching cars every 3 or 4 years is a phenomenal waste of money.
posted by Flunkie at 4:28 PM on October 8, 2007

30 years of retirement commencing at age 40? This matters for the acceptable rate of erosion of your investment capital. It is mathematically simpler (but financially harder) if you decree that you will live forever, because then your acceptable rate of erosion of your investment capital is 0, which simplifies the formula:

Principal * investment return % - taxes - inflation counterweight = spending money

To find the exact answer, all you have to do is foresee 30 years of investment return rates, inflation levels, and capital gains tax policy. Good luck!

The math gets harder (but the financing easier) if you suspect you will eventually die. First you select your day to die, then you use a more intimidating formula against a smaller lump of capital that yields the same yearly spending money, but doles out your investment capital as a part of your spending money, eroding your investment capital and grinding down your once impressive nest egg until you the day you selected to die, whereupon you expire as a destitute old man in a comfortable home. God help you if you have the misfortune of outliving your nest egg.
posted by NortonDC at 4:34 PM on October 8, 2007 [1 favorite]

@Flunkie:

Side question: Is really switching cars after 4 years a waste of money? From my experience they start giving mechanical troubles after 50000km of use (at least the European crappy cars I buy :) ) so your maintenance costs soar high and it becomes cheaper to buy another car; it doesn't have to be brand new though. I usually buy cards which are 2-year old, so I won't lose much with depreciation.
posted by dcrocha at 4:46 PM on October 8, 2007

If you aren't working and aren't retirement age, then you need to budget for healthcare.
posted by theora55 at 4:47 PM on October 8, 2007

Side question: Is really switching cars after 4 years a waste of money? From my experience they start giving mechanical troubles after 50000km of use

Yes, it is a waste of money.

Upkeep costs are absolutely nothing compared to new car costs.

New tranny? A couple grand. Radiator goes? A grand or so. Engine rebuild? What, a couple grand maybe? Random crap like breaks and tires? Not much. And once these things are done, they're done. Those major fixes will carry you through ten years or more.

Compared to twenty, thirty grand every three or four years? Or more? This stuff is nothing.

One thing that car dealers will tell you is that you don't want to spend that $1500 to fix your engine, because your car is old and so only worth $800, and it doesn't make sense to spend $1500 to fix an $800 car.

That's total bullshit -- total bullshit -- designed to get you to spend money.

The value of your car to you is not the price that you could sell it for ($800 or whatever). The value of your car to you is the cost that it would take to replace it. Many, many thousands of dollars, and certainly more than it costs to rebuild a tranny.
posted by Flunkie at 4:56 PM on October 8, 2007 [9 favorites]

I would like to live in a 3-bedroom house, fully paid (no mortgage for God's sake), a swimming pool, 100 to 200 miles from the beach, a decent car (nothing too fancy like a Lexus), normal monthly spendings for a family of three (wife + kid), one or two international trips a year, some money to take courses

This is "decent middle class" in your country? Cool. Sign me up.

Though it may feel like you've precisely defined a lifestyle, realistically this still has huge cost variability within the US. By "beach", do you mean ocean coast ($$$), or would any lake/stream/pond do? Does this swimming pool need to be located in a climate where it's usable most of the year ($$$), or just summer? Are you picturing "international travel" as transcontinental airfare for three people and 3+ star hotels ($$$), or driving across the Canadian or Mexican border and clean motels? Even car costs are variable; automakers and oil refiners have to meet more stringent requirements to sell in California, so even auto budget depends on where you plan to live.

You need to do some research, pick the city that your family is saving for, then work your calculations from those local costs.

When you use the retirement calculator, don't forget to budget for Capital Gains Tax. Uncle Sam wants his cut.
posted by nakedcodemonkey at 5:19 PM on October 8, 2007

I go through cars about that fast, but if I was living off investments, I would probably only need a "new" car (and it would be used but new to me) every 10 years.
posted by thilmony at 5:20 PM on October 8, 2007

If you aren't working and aren't retirement age you're in the US, then you need to budget for healthcare.

Fixed that for ya'.
posted by nakedcodemonkey at 5:21 PM on October 8, 2007

Tips, you say. Good enough. Don't assume death at 70. Assume death at 95. Or even later. (You can google for estimated time of death depending on your situation.)

If you do pull this off, don't lounge entirely. Keep your hand in something that keeps the job related skills sharp just in case. Nothing worse on a resume than a large blank space. (Which raises the question of working papers in this country- not something to dismiss lightly. Unless you're, say, a writer, and as such exempt from such things.)

Don't underestimate the cost of health insurance, particularly as you age. For all the talk of universal health care here, I wouldn't count on it happening any time soon. Currently, individual health coverage can be atrocious. Try to find a group (freelancers of whatever sort- again, google is your friend) you can become part of to get lower rates.

Rent before buying. It sounds like you haven't decided on the place just right for you. When you find the right one, you'll know. (NB- real estate taxes are local in America and can fluctuate wildly, even within the same state.)

If your car is turning up mechanical trouble at 50,000km, you definitely need to shop for a different make of car.

Fascinating that you have this dream. I'm more familiar with the cliche of Americans hoping to retire young to the more pleasant backgrounds of Umbria, or Costa Rica, or wherever. Not that many Americans are going to be able to do that much longer....

(FWIW- I wouldn't start at any number below three million, and that assumes owning a house outright. But I am not a very bold person.)
posted by IndigoJones at 5:24 PM on October 8, 2007

thanks, nakedcodemonkey.
posted by theora55 at 5:33 PM on October 8, 2007

Are you planning to put the kid through college? It's not free in the U.S., and can be really expensive for the better schools.
posted by amtho at 5:50 PM on October 8, 2007

As for the health care expenses, you'll also need to cover your dependents, unless your wife works and can cover the child and/or you in her insurance. You'll also have to finance your own probably increasingly astronomical health care coverage up to your death, because if you retire to the US in your 40s, don't work and therefore never pay FICA/Medicare taxes, you won't be eligible for Medicare -- unless your wife contributed to Medicare at work for at least 10 years.
posted by FelliniBlank at 6:09 PM on October 8, 2007

It looks like my dream is nothing more than a dream :D

Perhaps the easiest way would build a big business and then sell it and keep some shares to live off its dividends + the money made on the sale? Like some of the dotcom bubble millionaires?
posted by dcrocha at 6:31 PM on October 8, 2007

Plenty of dotcom millionaires crashed and burned before cashing in.

Plenty of money to be made in unexciting businesses.

Question then becomes, are you the kind of person who can devote 24/7 to a business however intrinsically dull for however long it takes? And then do it all over again once that business fails? (Entrepreneurial failure is not held against you in America the way it is, I gather from natives, it is in, say, France. Quite the opposite, in fact.) If yes, give it a shot.

Subject of another question, but don't give up just because of what we say. It's an admirable goal, not far off my own dreams. It's just a question of how to make it work.
posted by IndigoJones at 6:38 PM on October 8, 2007

I hope thats not the definition of "middle class"... because if it is, I'm not ever going to reach it. (Course, I'm also your average american who has no assets and several 10's of thousands of dollars in debt, and working 3 jobs to get out of it.)
posted by jmnugent at 6:55 PM on October 8, 2007

>The value of your car to you is not the price that you could sell it for ($800 or whatever). The value of your car to you is the cost that it would take to replace it. Many, many thousands of dollars,

That is a brilliant way of looking at things.
posted by philfromhavelock at 7:01 PM on October 8, 2007 [1 favorite]

I would like to live in an average-living-cost city (not NYC or LA for example), have a decent middle class life, with a fully paid house, switching cars every 3 or 4 years, and my monthly income would come from investments.

Dude, this is not in any way, shape, or form a decent middle class life. It's practically the definition of upper class here in the USA. A paid off house, new cars constantly, multiple international trips per year, living off your investments... that's not middle class.

If it were just you, I'd say 2.5million. With a family I'd put the figure closer to 4million since you may well have to pull out hundreds of thousands of dollars to pay for each kids education.

$4,000,000 USD is a good figure to shoot for. That's after you have paid cash for your house.
posted by Justinian at 8:38 PM on October 8, 2007

For this to work, you need to have a certain amount of capital that can be invested in income returning investments. You have to have income for three purposes:

1) What you spend on housing, food, entertainment, everything else.

2) What gets added back to the capital to offset the effects of inflation. This doesn't need to fully offset inflation, just enough so that your capital lasts until your death.

3) What you need in order to pay taxes on the income you're making.

If you assume that you can reliably make 5% income on your investment (10%? Come on, not even Buffett can reliably achieve 10%, and this has to be reliable every month for the rest of the OP's life, or else he doesn't eat), then you should probably allocate those 5% as 2.25% for spending, 2.25% to add back to capital, and 0.5% for taxes. 5% income should be quite doable with various sorts of bonds.

If you can live well on around $50,000 a year in 2007, which I think is quite doable as long as you pick a place with a lower cost of living, then you need about $2.25 million to make this work. Not all that much.

If you're willing to take a little gamble, you'd invest the money in residential real estate in a population-growth and industry-growth area of the country. You come up short on the income in the first few years, but eventually appreciation of the real estate takes care of the problem of inflation devaluing your capital, and rents rise to take care of your cost-of-living increases.
posted by ikkyu2 at 8:39 PM on October 8, 2007

Ikkyu2: $2.25 to $2.5 million is what I figured... just for the OP. Did you consider he has a family, particularly a kid and possibly more in the future? I think that complicates the picture and would require considerably more the be at all a responsible thing to do.
posted by Justinian at 8:43 PM on October 8, 2007

uh, considerably more TO be at all a responsible thing to do.

You need contigency funds to pay for education, catastrophic health care costs, etc.
posted by Justinian at 8:44 PM on October 8, 2007

Many financial advisers rely on the Trinity Study to estimate retirement requirements. The Trinity Study looked at all periods from 1926 to 1995 and calculated the probability of having your portfolio last for 15, 20, 25 or 30 years based on the composition of the portfolio (stocks to bonds ratio) and the annual withdrawal rate.

The conclusion was that if you withdraw 4% per year and annually adjust your withdrawal for inflation, you would have had a nearly 100% likelyhood of not going broke. Any more than a 4% withdrawal rate and you risk eating Alpo in your twilight years.

4% per year means that your portfolio should be 25 times the amount that you want to withdraw each year to live on. For example if you think that you can live on $40,000 a year before taxes, you would need $1 million. If you want $60,000, then you would need $1.5 million. You can reduce the required amount by your expected social security or pension payments. For example if you expect to collect $15,000 in social security and need $40,000 to live on, then you only need $25,000 from your porfolio. That would require a portfolio of $625,000. Note that this analysis assumes that you eventually spend your portfolio down to zero and have nothing left. That doesn't leave any margin for error.

The median household income in the U.S. is about $48,000 per year. Also note that a 45 year old male has a median life expectancy of 33 years. If you are heathy and lucky you might live a lot longer and have a greater chance of running out of money before you die. The best way of insuring you don't go broke is to work longer before retiring so you don't have to start drawing on your portfolio so soon and also to save more than you think you might need in the best case.
posted by JackFlash at 9:45 PM on October 8, 2007 [3 favorites]

Also note that the analysis above assumes you are retiring tomorrow. If you expect to retire 15 years from now, then assuming that inflation averages 3% you will need about 1.5 times those amounts for your portfolio.
posted by JackFlash at 9:57 PM on October 8, 2007

Being a math (and money) moron, I have no idea what dollar amount it would take to pull off what you're talking about, or what investment strategy would work the best. But from a "life philosophy" point of view, think about this:

You're talking about having no mortgage, a pool, a car every 4 years, working really hard up front to get the money, etc. The real problem, I submit, would be that the values that are driving your dream would never allow you to be satisfied with your dream lifestyle for very long. If all you had to do all day was enjoy your "middle class" life, based on what you've revealed by your stated aspirations, you'd soon be itching to one-up yourself... and that's where the trouble would start.

And at the risk of sounding sexist, I daresay that any woman on Earth who would go along with your plan would get "itchy" even faster than you would.

What's that principle called where things tend to accumulate to fit the space around them (if your small house is full of junk, getting a bigger house only guarantees a bigger house full of junk)? Your lifestyle is the same way.

Your plan, IMO, is much more a recipe for disaster than for success. If it were this simple, we'd all be "middle class" in the way you describe. There are more millionaires in the USA than ever before, even adjusting for inflation, and none of them (for the reasons I stated above, I suspect) just stops one day to relax and enjoy it.

And just out of curiosity--I'm going out on a limb here, but are you by chance living in India now?
posted by Rykey at 11:02 PM on October 8, 2007

The value of your car to you is not the price that you could sell it for ($800 or whatever). The value of your car to you is the cost that it would take to replace it. Many, many thousands of dollars, and certainly more than it costs to rebuild a tranny.

It's amazing how many people don't understand this. And it doesn't just apply to cars, either.
posted by oaf at 4:49 AM on October 9, 2007

Stupid math.

Save $12 million dollars. Then you'll be fine.
posted by craven_morhead at 5:31 AM on October 9, 2007

Rykey said what I'd say. And better. Listen to him (or her). Probably him though, since he's talking about women and their itchy trigger credit card fingers. But yeah:

WHEN YOU MOVE TO THE US, YOU'LL CHANGE. ALOT.

Your 3 bedroom house will seem small. You'll need a new TV -- no seriously, one that's *flatter* than the one you have now. It's amazing to think about how quick we all were (ok, not me.... yet) to buy a device that does the same thing (more lines of resolution don't count unless you're watching sports. some shit is worse in HD), but that's a bit thinner. Your garage will accumulate tons of yard maintenance gear and a ladder and a set of bikes. And where will all your pool toys live? What about

Not to mention how your eating habits, social habits, and everything else will change. This entire country is designed around consumers consuming lots of (shiny) new, fun things. Consumers consuming goods and especially services will change your life drastically and in ways you can't predict.

See: Hedonic Treadmill. Oh, and the Wealth Effect
posted by zpousman at 7:37 AM on October 9, 2007

Anyone who believes that buying a new car every three years is fiscally prudent and believes Metafilter is a good way to set his financial goals probably doesn't need to worry about being able to retire at 30.
posted by srt19170 at 8:06 AM on October 9, 2007

@srt19170

I'm not asking Metafilter community to solve my problems. I find this an interesting subject so I enjoyed putting to discussion. Not that I will follow each and every advice given here.

And neither do I find switching cars every 3 years fiscally prudent. I only asked that because in my country car production is so heavily taxed that companies (most of them European) make cheap cars with cheap parts and those cheap cars start presenting troubles after 50000km in the vast majority of cases. Companies do this because of the heavy taxation.

Just to give you an idea, cheapest car sold here is Fiat Uno (yes, the same from the 80s, revamped 250 times), which sells for a nice USD 12,000. Sounds good to you? Have you driven one of those? When they reach 50000km they're almost falling apart. It's not like buying a Honda Civic for USD 15,000 (like you do in the US) and having it forever. This very same car costs USD 32,000 here.
posted by dcrocha at 8:50 AM on October 9, 2007

Are you in Italy, dcrocha? You ought to take a minute to consider the food situation here in the US. Things that Italians are used to, such as decent tasting non-GMO produce and humanely farmed meat, are really obnoxiously expensive here. The average American eats a diet that the average Italian would consider poisonous.
posted by ikkyu2 at 11:22 AM on October 9, 2007 [1 favorite]

Not exactly an answer to your question, but just my 2 cents.

Have you considered moving to a south Asian county, where you will get a good exchange rate for US$.
You might b able to achieve everything you mentioned (like beach house, etc...) from something like $500,000.
posted by WizKid at 2:05 PM on October 9, 2007

For my personal calculation, I need $3.5M in present dollars. However, I want a place in the country (with a small orchard), a place in the city, an ok fishing boat, a mini to drive, and an old car to play on. I also plan to make lots of money.
posted by a robot made out of meat at 3:21 PM on October 9, 2007

Maybe you could consider living in your country, but long term visits to the US (or elsewhere if your priorities change)?
Traveling from a european country to other cultures is vastly cheaper than doing so from the US, and if you want to do it a few times a year it will soon add up.
I agree the Fiat's can be problematic, how about a VW or an Audi? These seem to offer better quality (well, the one's I've owned did).
Also, you might like to investigate annuites as an investment. These pay a set amount for a fixed term or for the rest of your life. They are designed to help people with a big pile of cash fund their retirements without requiring them to understand finances or investments. Be aware however, if the annuity is not indexed to inflation (or better yet wage growth) the $40k you get in the 25th year, for example, will only buy what about $20k will buy today.
posted by bystander at 7:55 PM on October 9, 2007

For all people who asked, I live in Brazil.
posted by dcrocha at 9:31 AM on October 10, 2007