Retiring with enough …

Philip Brewer has written a couple of articles for Wise Bread exploring the question: “Can You Buy Your Way Out of the Rat Race?”.

He says:

If you’re tracking your spending, you know how much money it takes to live on. If you’re tracking your investments, you know about how much return you’re getting from your capital. With those two numbers, you can get a pretty good estimate of how much money it takes to buy your way out of the rat race.

In its simplest form, the cost to buy your way out is just your annual spending divided by the return on your investments. I used to do that calculation a lot. When I got my first job interest rates were in double digits, so I could imagine getting $30,000 or even $40,000 a year — plenty of money to live on — from an investment as small as $300,000.

This is good advice if you want to retire on “$30,000 or even $40,000 a year” … I don’t 😉

The problem with these types of retirement articles is that they usually start from the assumption that your current salary +/- 30% is what you want to live off.

When my salary was $250k, this probably also held true for me … but, just a year or two earlier (when I was actually planning my own retirement) my salary was only $50k – plus my wife’s $60k, making our total household income less than half my ‘required retirement salary’.

So, I describe the retirement calculation process much as Philip describes it, with an extra step:

1. Decide what you want to do with your Life

2. Decide how much annual income you require (probably, without needing to work … but, that’s up to you)

3. Convert that amount to the capital that you need.

Now, Philip would say that you should subtract any income and/or pensions that you expect to receive along the way …

… I recommend that you don’t.

You see, you may not want to – or be able to – continue work through your ‘retirement’ – and, government pensions can always be taken away.

Rather, I recommend that you assume neither of these while you are ‘retired’, and reinvest any such ‘windfall income until you have enough accumulated to effectively increase your Number, hence your standard of living.


Well, Philip suggests:

Among people who invest for large institutions, there’s a rule of thumb that you can spend 5% of your endowment each year, and then expect to have a bit more to spend next year than you spent this year.

Of course, they can’t expect that 5% to be more every single year. Some years the investment portfolio does poorly–and after one of those years, the 5% that’s available for spending will be less than the previous year. Maybe much less.

For households, therefore, the rule of thumb is 4%.

We have a similar rule: The Rule of 20, which seems effectively the same as Phil’s 5% Rule [AJC: we’ll explain why it’s actually a VERY different concept, in a series of MM301 posts, coming up soon] … this is probably enough because you will probably:

– Earn some additional money in retirement (remember those part-time income and pensions that we mentioned?)

– Spend a little less as you get older (unless you feel that health care will outweigh all of those Learjet trips?)

– Overshoot your Number, if you wait until reaching your Number (on paper) before actually trying to sell your business / real-estate, etc.

BUT, don’t let me stop you from building in an additional buffer by modifying my ‘rule’ to anywhere between the Rule of 20 to the Rule of 40.

Hint: I wouldn’t bother … the Rule of 20 is plenty to aim for; but, don’t let me stop you from aiming for more …

…. just don’t try and make it LESS 🙂

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10 thoughts on “Retiring with enough …

  1. AJ: Yes please, I’d like to overshoot.

    Question: When you hit your number or are well on your way toward it, how do you deal with family that are not making progress to their number (or likely ever will get there).

    Specifically, how do you keep a cordial relationship – i.e avoiding acting like a heartless a-hole but also avoiding being the family patsy / sucker who pays for everything.

    If you are making good progress toward your number, you are likely very hard working, talented and lucky. Chances are that family members lagging behind are lacking one or more of those traits, often the one associated with hard work.

    What do you do? What do other do?

  2. I think your step 1 is the most important: Decide what you want to do with your life.

    I wanted to write fiction. That doesn’t take much money, but it does require time (and high-quality time at that). So, for me, getting free of a regular job as soon as possible was a much higher priority than accumulating a vast amount of wealth.

    I would like to suggest, though, that your ideas on which assets are secure and which aren’t could use some fine tuning.

    It’s true that you may not be able to work during your retirement, but most people will be able to earn at least some money if they need to. It’s also true that government pensions can be taken away—but so can anything else. In fact, I’d like to suggest that (given the number of old people and their propensity to vote) long before government pensions are taken away we’ll see confiscatory taxes on income (and perhaps on assets as well).

    And don’t forget all the other ways that things can be lost or taken away—declining market can sap your portfolio, a lawsuit can seize your assets, a natural disaster can destroy your house.

    My point is not that it’s hopeless, but rather that while racking up assets may increase your standard of living, at a certain point it no longer increases your security. (A flood can destroy a house worth $1 million as completely as it can destroy a house worth $100,000.)

    A certain measure of security can come from diversification. The law (currently) protects IRAs, 401(k)s, and pensions from most kinds of lawsuits. Insurance will protect your home from most kinds of natural disasters. Real estate and bond investments will protect from a stock market crash.

    Core security, though, comes from your own productive capacity—something that can’t be seized by the government or have to be abandoned when a flood forces you to flee to higher ground.

    At some point—and to my mind the point is well before you have $7 million—you don’t get as much security from adding another million to your portfolio as you get from learning another skill or buying some more tools or making friends with your neighbors.

  3. @ Jake – Hmmmm … a tough one, and I have financial messes on both sides of my family (my wife’s and mine) 🙁

    @ Philip – Thanks for your articles … and, comments!

  4. @Jake – at a certain point you have to take care of yourself first and worry about others second. The Millionaire Next Door’s comments on economic outpatient care applies as much to adult relatives as it does to children. My financial rise, fall and recovery of some of my mother’s siblings and the associated in-fighting would provide enough material for at least two seasons of a pretty pathetic tv soap series. The best thing to do is to stay out of it and keep a low profile.

    I agree with overshooting – insurance against an uncertain future.

  5. Jake, I would answer your question about family lagging. If someone in your family is not doing as well financially, then perhaps you would do well to teach them. Instead of feeding them(money and other things) teach them, so they can provide for themselves.
    Once they have the knowledge(courtesy of Jake) it will be up to them to do for themselves. you’ve done your job by passing forward your knowledge of how to gain wealth.Its all they can expect.Its all they really should expect.

  6. Thanks all.

    I have tried and will continue to help them by teaching, counseling etc to put them on a success vector.

    However so far they have either fully ignored my advice (and acted contrary) or acknowledged it and then done nothing. Very frustrating, like watching a slo-mo train wreck: you can see it coming YEARS away, but people are moving too slowly to get out of the way.

  7. @Jake

    I agree with @traineeinvestor that economic outpatient care won’t help. I think you can still help out family by creating positive economic incentives. Help them by inspiring and motivating them to help themselves.

    For example let’s say you want to motivate your relatives to save more. You could offer a saving match- for every $1 they save you could match it at some %. You could put a cap on it to insure you aren’t giving too much. Want them to read and understand some book? Make an essay contest- the best gets the most $ but have enough that everyone that completes the essay gets some $.

    -Rick Francis

  8. @ Rick – Case A: treat your friends/relatives like children (in which case your comments are really good!); Case B: treat them like selfish adults (in which case, you’re best off leaving them well alone). I see mine as Case B (mostly) … cynical? Yes, but Unfortunately so!

  9. @Adrian

    I think you are a very tactful and creative person. I suspect you could come up with a lot of ideas as to how you could help your family using incentives without offending them. As for selfishness…isn’t that necessary for an economic incentive to work? The real question is would you be willing to take the risk?


  10. @ Rick – Who’s concerned about offending anybody … this is purely self-preservation! I have found, through plenty of experience with trying your strategies, that once you turn the tap on it’s very hard to turn it off again 😉

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