How much can I afford

August 8, 2020 7:19 PM

I was wondering where to live and how much I can afford to spend on fixed expenses with a nest egg of $250k, expected earnings of about $50k annually, with 20 years to retirement when social security should kick in. No debt, US citizen. I'm thinking, for example, Arizona 50 plus communities, but not sure how much those cost. How should I go about thinking about this? What kind of professional would help?
posted by perdhapley to Work & Money (10 answers total)

One super-basic, not-personalized-to-you rule of thumb is that when you’re working you should spend 50% of your income on necessities, 30% on discretionary purchases, and 20% on long-term savings. So that would imply that you should look at your expected paycheck (paycheckcity.com is one site I know that can estimate this, based on your deductions and residence) and (adding back in pre-paycheck savings) figure out your take home income. If you can survive, without entertainment or other luxuries, on 50%, you’re in a good situation.

You can probably get a good handle on this yourself, based on your explanation of your situation; the harder part will be figuring out the true cost of living in a particular 50+ community, since the folks selling you a spot have an incentive to get you in, but you can probably get a good sense by talking to current residents. A consult with a fee-only financial advisor is rarely a bad idea, but you can also understand the basics of your financial situation fairly easily just on your own.
posted by exutima at 8:12 PM on August 8, 2020 [1 favorite]

"The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors obtain a rough estimate of how many years it will take for the initial investment to duplicate itself."

So, your principal could double in 20 years if your average annual returns are only about 3.6 percent. Over the past century, U.S. stocks have returned an average of around 10 percent. You could do better or worse.
posted by NotLost at 8:40 PM on August 8, 2020 [1 favorite]

Response by poster: That's helpful, exutima. According to paycheck calculator I would have on average (using high tax and low tax states) $1600 month to spend on fixed expenses, which would be 50% of post tax income.

To refine my question, where can I live having $1600 month to spend on housing and car/public transit, with $1600 left for discretionary spending/saving?
posted by perdhapley at 8:41 PM on August 8, 2020

Green Valley, Arizona, is very affordable while still having amenities and being close to Tucson.

But there in particular and Arizona in general may face water shortages, especially with climate change.
posted by NotLost at 8:50 PM on August 8, 2020 [1 favorite]

Before retiring early, I scoured the net for a calculator that wasn't a simple one based on averages. FIRECalc was by far the best (FIRE means Financial Independence Retire Early). It's designed for those who are "Thinking of chucking it all and retiring early, long before you start getting a pension or Social Security, and before you have ready access to your 401k and IRA?"

It's not easy to use. But it's worth it. There are instructions, best read before the first time you use it.

The calculator
The support forum
Google 'firecalc' for recommendations from financial types.
posted by Homer42 at 1:04 AM on August 9, 2020 [6 favorites]

Unless I'm misreading your spending parameters, almost anywhere in the continental US except rent hotspots like SF, NYC, LA, etc. would be well within your price range. Most metro areas (excluding hotspots) have studios or 1 br apts for $1000 or less. In more some areas that might get you a free standing house.

With that kind of nest egg, you could buy a small plot of land and a mobile home outright in a lot of areas. You could buy a $200k house if you dont mind using some of your nest egg for a down payment. Your mortgage would be around $700.

Are you working to earn this money? If not, you could move to Mexico or Central America and slash your living expenses by 50 to 70% and probably retire early.
posted by ananci at 7:25 AM on August 9, 2020 [2 favorites]

Response by poster: Sorry for the back and forth. I'm clarifying my ask as people help me. I can post a separate ask if preferred.

Ananci, I would be working to earn the 50k, not retiring early.

At retirement my hypothesis is I'd have the nestegg plus social security, as my earnings won't allow me to supplement my future retirement by much. So I suppose I need to figure out what to do with the nest egg to be able to supplement social security. I assume I will get maybe $1600 a month in social security.
posted by perdhapley at 12:31 PM on August 9, 2020

You have the $250k now right, or will have it in the future, in 20 years? You could easily double that in 20 years, which would give you approximately 4% of $500k, or about $20k a year (without touching the $500k) to spend. Realistically, you could quadruple it to $1m in 20 years, which would give you $40k to spend, without any additional investment. If you can invest more, it would be even higher. Time is still on your side.
posted by The_Vegetables at 8:20 AM on August 10, 2020 [1 favorite]

Response by poster: I have 250k+ now as equity in NYC real estate. The (+) I left off as there will be taxes etc upon sale.
posted by perdhapley at 11:21 AM on August 10, 2020

Real estate generally appreciates at about 2% per year across most of the US, at the rate of CPI inflation. NYC may be a bit higher than that, in the 3-5% range.
posted by The_Vegetables at 1:50 PM on August 11, 2020 [1 favorite]