One of the questions I get emailed quite often goes something like this:
I read online that you have $3 million and retired at 52. How did you do it? I am in about the same situation and I’m afraid I don’t have enough.
That’s paraphrasing, but those are the general thoughts.
There are actually two questions here that I’ll address: 1) How did I manage retirement on $3 million? and 2) How can they retire given the assets they have?
Let’s take those one by one.
How We Retired on $3 Million
In case you missed it, it’s clear from The First Million is the Hardest that I have at least $3 million in net worth.
Here are my retirement expenses and income. They show clearly how I’ve been able to retire on this amount:
- Our family needs about $85,000 a year to meet our needs. This results in a good standard of living, as you might imagine, especially since we don’t have a mortgage (or any other debt) and don’t need to save (eliminating another big pre-retirement “expense”.) So the $85k is completely for spending. It should decline as the kids leave home (we’re in the transition phase now) though it might remain the same if we choose to travel even more.
- Our rental properties provide $60k in income net of expenses per year.
- The dividends from our brokerage account provide $10k per year.
- Our P2P loans provide $10k per year.
- My two blogs provide $5,000 a year (and growing).
- We have some miscellaneous income like interest from “high interest” savings accounts, credit card rewards, and the like, but that’s fairly small.
Update: If you want newer numbers, see 2017 Financial Year in Review and 2018 Forecast for details.
Note that this income is generated from about half of my current net worth. The other half is in tax deferred accounts at Vanguard just sitting and growing for another 20 years or so.
So I don’t really need $3 million to retire. $1.5 million deployed the correct way is fine.
And, of course, none of the income requires spending/drawing down any of the assets. If I wanted to apply the 4% rule, I could have another $120k in annual spending. Wow, I don’t know how I’d ever spend all of that.
Why $3 Million is Not Enough for Some
Now on to the second question — from people who also have $3 million in net worth (some even more!) — all concerned with the fact that they don’t have enough to retire and/or asking “how can it possibly be done?”
My response is usually something like this:
If you have $3 million the 4% rule says you should be able to withdraw $120k per year and the money will probably not run out on you.
Believe it or not, this is where things begin to break down.
More often than not I get some sort of response like this:
Yeah, that’s the problem. I just don’t know how I can make it on that little. I spend about [they quote a number tens of thousands of dollars higher than the numbers above] a year and can’t really go any lower.
You can imagine what’s going through my mind when I read stuff like this.
Sheesh, I thought $85k in retirement was a pretty healthy amount. But these people are telling me they can’t make it on $120k. One guy told me he’d have trouble getting below $225k or so.
These may seem like extreme examples but I have received several emails similar to this. So it’s a widespread problem.
I’ve even had them send me their budgets/spending by category and looked them over (FYI, do NOT send me your budgets as I am not willing to do this very often). Almost every line item is twice as high or higher than what we spend on comparable costs. And when I offer ways they might be able to save, my suggestions fall on deaf ears.
Obviously they don’t have an earning or investing problem, they have a spending problem.
Spending is Key
This is exactly why Save Overview: Just as Important as Earning was one of the very first posts I wrote for this site. Because you can spend it all (and more) whether you earn $40,000 a year or $400,000.
If you can’t keep spending under control (and work to lower it to what I’d consider at least reasonable levels), you’re going to have a hard time ever retiring.
Obviously people retire on much less — like $1 million. But to do this they have to keep their spending in line. If you can’t do that and need a couple hundred thousand dollars every year in retirement, you need a BOATLOAD of money that is even hard for the top echelon of earners to bring in.
Any thoughts, questions, or suggestions?
In your case $3 million is fine to retire.
1. I would say that the 4% rule would apply to those that retire at 65. If you retire earlier that I would reduce that. Say 3 – 3.5% rule for you.
2. You are withdrawing 2.67%. $80000 divided by $3 million. I consider any earnings not reinvested to be withdrawals.
3. You probably have other down the line income. Pension? Your Social Security at 66 to 70 years age. Your wife SS at 66 to 70.
ESI – You are in good shape.
“I consider any earnings not reinvested to be withdrawals.”
Interesting. I’ve never thought of it that way. I’ve always considered “withdrawals” to literally be withdrawing something from assets.
It’s a unique perspective I’ll need to ponder a bit.
Yes, I “ponder” now that I have the time. 😉
Really thought this quote was interesting – “I consider any earnings not reinvested to be withdrawals.”
There’s definitely some truth to it. The more you reinvest, the better shape you’ll be in!
I have to say, I think of it this way too. More from the perspective of being conservative, than any other reason.
In fact, with a good plan (like you have) those distributions (dividends, P2P lending etc)… won’t reduce the amount of capital you have… AND you can expect the distributions to go on being paid without being reduced… then you are at the same spot where you started after the distribution, so from a retirement perspective, perhaps your way is more “accurate” (though, perhaps still less conservative).
In fact, as you may remember, I invest in companies with long histories of increasing dividends, which means my distributions will go up over time (as will my expenses)… so by using dividends I remain in a good retirement spot.
Another thought, overall — expenses depend in large part around lifestyle choices — for example, I’m your age, but have young kids – so my education expenses will be naturally higher. I’m also managing some medical issues, which show up in weird places (higher childcare costs, more expensive vacations in both bases I can’t do it all myself so have to pay for higher service, etc.). So, while I agree we can often spend less than we think, but I know personally I couldn’t get by on half of what you do (oh yeah, I also live in NYC!) but that it’s also a choice to do so.
David
It’s not just conservative. The 4% “rule” includes spending both dividends and interest. Also AFAIK said “rule” includes rebalancing to keep the portfolio in the specified asset allocation. Since bonds pay more dividends, then you would probably end up selling stocks to buy more bonds.
Another aspect is, considering dividends different from capital gains, one available to spend and the other not, will cause you to value dividend paying stocks more than capital gaining stocks. Now of course some people are in favor of dividend paying stocks anyways, but, it might be worth decoupling that decision and analysis. It’s kind of like an internal conflict of interest, it may effect your decisions to be suboptimal even if you don’t realize it.
Good! Thanks for your valuable insights including the value of having the time to ponder.
Just started reading your site. Great work.
I think the most important info you mention is that you actually live on the income generated from $1.5mil. I’m I correct to assume that the value of the vehicles that you mention that creates the $85k per yr is $1.5mil? And then you have another $1.5mil in vanguard funds for a total of $3mil?
If so than your actually living on more than the returns from $1.5mil? No mortgage, no car payments, other debts would probably push the $1.5mil to over $2mil right?
It depends on each situation. My biggest concern would be medical bills. If you have good insurance then 3 million will be more than enough for life.
My husband had multiple glaucoma surgery in early 40’s, each cost more than 100k,but with insurance we pay 20 dollars. My father in 80’s had gallstones removed and procedures took 3 times. Each cost over 200k, but with Medicare we pay deductible 2200.
I think over lifetime, each person probably needs 1.5 million to cover unexpected health cost, if one were to retire early. I might be over pessimistic but it really cost alot to live in America. You almost have to be healthy or wealthy. Or pray not to be fired from a job
I don’t understand how you could ever get to $1.5m in healthcare costs unless you live in the US, have a chronic illness and are uninsurable.
$1.5 million would effectively give you 30 years of coverage at over $4k a month. I’m pretty sure you could get 30 years of critical illness coverage for a fraction of that.
Must just be because I don’t make near that much, but I don’t see how someone couldn’t move down from 200k+! I can totally see when I get older, needing around 70k-80k, I can even see some needing 100k+ but wow. But like you said, gotta keep spending under control, probably even more so when you don’t have any active income coming in.
I retired this year at 60. Our health care premiums are $28,000 per year..plus our real estate tax on a million dollar home is $20,000…our son is completing college in two years but we pay $20,000 per year for that. We pay another$20,000 on a mortgage of $175,000 and $15,000 on insurance for homes and autos. Roughly $103,000 is spent on fixed costs. That’s how you get up there near $200,000 per year. What to do? Down size..we can get these bills down to $50k. Once college is over…two years…no college, morgage, re at $10,000 less ect. It’s the health insurance that’s near $30,000 per year that’s a budget buster. You need $750,000 in Investments just to cover that.
So true! I’m in my early 40s, but I believe people severally underestimate the true cost of retirement by minimizing inflation, health care costs, possible illness and taxes. And general cost of living in larger cities. $1.5M is no where near enough for me to retire comfortably. I think it’s inaccurate to minimize a lump sum as being enough, while receiving passive income from real estate and dividends, that amount is not part of a lump sum magic number. I think retirement values can be looked at two ways: monthly cash flow and lump sum cash with 4% withdrawal. The lump sum with 4% withdrawal rate reduces the principle. I would need $10M to withdraw on to feel safe. But if I’m generating $15k a month after tax income in real estate and stock dividends then that lump sum of cash reduces significantly and $1M to $2M lump sum is all I would need. So I believe these conversations can be misleading if there isn’t a distinction made regarding withdrawals versus cash flow. The numbers change significantly when that’s taken into account.
First off: Congrats on having $3M in net worth! That’s no small accomplishment.
I think most people under-estimate the power that decreased spending gives you when it comes to being able to retire. This is why you see so many blogs / articles about frugality. It’s not because everyone wants to grow their own vegetables or never shop at the mall. It’s because they are trying to find constructive ways to get their finances under control. Using the 4 percent rule, your nest egg should be at least 25x what you spend. Get your spending down, and your nest egg target falls with it.
For me, frugality doesn’t mean having to live like you’re an early 1800’s pioneer. I have a simple goal to spend money when there is a purpose, not just because we’re bored. When I need something, I make sure to get the absolute best price. Most people would be surprised at how far going the extra mile gets them.
We are 100% on the same page!
In addition I’d say that living on $80k to $100k can be quite a luxury — especially if you live in a low-cost market.
I feel like we’d be hard-pressed to spend more if we had to. I certainly don’t grow my own veggies (though I’d love to — for FUN) and I do shop at the mall. There’s very little I want and don’t buy. So we have way more than enough. If we wanted to we could probably live on somewhere around $40k a year and still not feel too constrained.
So yes, I agree with being selectively frugal. But at this income level, I don’t really feel like I have to.
Also, this is roughly twice what the average U.S. household makes in a year. How could someone have trouble making ends meet? That’s what floors me most about the “I can’t retire with $3 million” comment.
Does he have country club dues, golfing everyday? Our expenses will be traveling, but on a day to day basis, there isn’t much to spend money on but beer and food. Yes, things break, things need to be maintained, but in general, it doesn’t cost much day to day.
Wow, great info! We live in a rural area. One income, husband earns $70k. After our 401k, insurances, taxes, etc bring home averages 4000 a month from his salary (and his side job a few hours a week brings in about 400-500 a month which is strictly to savings). We own everything and have no debt (no car pymts, mortgage, loans, etc) at the moment and put almost 50% into savings which includes “buckets” for home repairs, medical deductibles, dentist expenses, car repairs and other periodic maintenence. We allot 380 for groceries and 200 for gas every month and usually come in under since our son moved out. That may sound impoverished to some (all subjective) but we live happily. We take trips we save for, we eat out, etc. In our current experience, I can’t even imagine 85k. Haha Even so, still trying to figure out how to work a retirement plan since we started late in learning the importance! Thankfully, he has an annuity plus full health care benefits at retirement from previous job and a pension with the new job so I feel that is a huge plus in our plan (especially after reading comments of potentially high cost insurance).
I think you nailed it! When spending is out of control you chain yourself to a paycheck.
ESI, thanks for the offer of reviewing my spending budget. Don’t tell me where to cut expenses, just let me know how I can retire at Age 50 with annual expenses of $225k and a portfolio of $795k. No excuses, just tell me how to do it.
Thanks for another great post. I’ll send my budget via IM.
That’s a mission impossible. Just do a simple math, you will go broke before you turn 55.
I’m assuming he was joking.
Die at 53
Yep, spending is the key. I FIREd at 52 on less than $3 million net worth, but our annual spending is only around $58K.
I used CFiresim and Firecalc to help determine if we had enough. By those calculators, we under-spend by about $35K per year.
How do you pay for your healthcare? How big is your family? Thanks.
I’m not sure if you’re talking to me or not, but here’s how I do it:
https://esimoney.com/picking-right-early-retirement-health-insurance-reviewing-options/
Financial Samaria did a good post on how to easily spend $200k+/yr.
Here’s the post if anyone is interested in it:
http://www.financialsamurai.com/how-to-make-six-figures-a-year-and-not-feel-rich-200000-income-edition/
Now, let me work my money-saving skills on Sam’s budget:
— 401k and taxes are essentially gone in retirement, saving $72.6k versus his budget
— No childcare or mortgage, saving $60k
Are we done here? I’m already down to spending only $70k and I haven’t even begun to fight!!!
— Food is overstated by about $5k
— No car payment — another $6k savings
— Property taxes overstated by $5k (thank you, low-cost city)
— I could probably get another $5k to $10k from all the rest on his list
That said, my spending is higher in some categories, namely vacations/travel and charity, but that budget is easily worked to $60k or so.
Saving in a 401K to me isn’t spending. As you say, that ends whent the paycheck ends.
What’s funny to me is you said 85K/yr and I said “whoa!” out loud because I thought THAT sounded like a lot. But you have kiddos and insurance to pay for so I get it.
Yes, and as I commented above, we really don’t have any spending constraints.
BTW, $10k-$15k for us each year is travel so we’re enjoying retirement. 😉
We are working a few years extra mainly to hit our pensions, but more importantly, we plan on spending $50K a year on travel. Which seems like alot, but hey, someone has to go on those cruises and fly first class. 🙂 Actually, my biggest cost will be renting houses/apartments in different cities. I am planning on $100 day for daily housing cost. So, it might cost us $10K to go live in Europe for the summer, or a house on Cape Cod…I will overplan and hopefully underpay.
Check out homeexchange.com. That is how my husband and I plan to travel extensively, save money on housing and making sure that someone is keeping an eye on our house.
Yeah, there are quite a few sites now, but I am going to try just to turn off the water and have internet cameras inside and outside the house with someone picking up mail once a week or so. But at some point, we might just be in a condo so we won’t have to worry about the house. We follow a couples blog that sold everything and is travelling the world. I don’t think we are that brave. We will definately try and babysit houses without having ours lived in. The timing of that seems hard.
I hear you on travel. We’re starting to realize that since we enjoy raveling so much, we should do it as much as possible and not worry about an annual vacation budget as long as we’re hitting our savings marks. And I have no doubt that will increase when we retire. I told my wife our brokerage fund might as well be called our retirement travel fund.
It would be fun to read a post / guest post on someone who went from a high-spending lifestyle (> $200,000 per year) to a more reasonable FIRE-compatible spending level (< $100,000 per year). The challenge will be finding someone who did so successfully.
Once you (and your family) get the hedonic treadmill running at high speed, it's awfully tough to dial it back without someone feeling deprived. It's much better to never speed up the spending in the first place.
Cheers!
-PoF
We never quite spent over 200k, but we are in the process of dialing it back as I go into early retirement and I intend to share the (hopefully successful) process. Our spending ballooned when we had kids. We were extremely time poor as two working parents each working over 60+ hrs per week. We spent frivolously on many services to save time.
Great site ESI and enjoy your’s very much PoF.
I’ve moved it down from $250-300k to $150-$180k. Careful use of MINT to understand what was going on over two years made a huge difference. I highly recommend it. That, plus some good choices, keeping perfectly good assets instead of trading them, and avoiding waste and lax planning got us there with little drama. It took focus and cooperation of spouse and understanding of grown kids, all of which happened very readily.
Would you be willing to tell your story? I think others could learn from it.
I’m happy to tell a little more of the story and respond to questions if people have them of course.
First, it’s important to set context. I’ve earned a very good income for a number of years and a great deal in more recent years (north of $1M) as a business shareholder. This is Canada, taxes are very high (effective rate is over 50%, high VAT, and with only a few of the deductions Americans are used to) and we live in Canada’s most expensive (and “best”) city overall. Still, life is great.
Clearly, with these incomes, a high lifestyle was affordable. We are not high spenders relative to incomes and savings were accumulating, not surprisingly, but not as fast as we would have thought. Schooling for the kids is provided for separately, so the glide path from FI to retirement was ours to shape.
I don’t like to have success by accident or brute force. There has been little recent money stress but the journey seemed open ended and vague to me. While risk was relatively low, and I had a feeling of general, high-level control over the situation, I felt the need to construct a more detailed framework to make better sense of our financial lives for the first time (not unlike my drive to have my professional life very well understood and thoughtful).
Legacy is also very important for us, as an opportunity for the kids. Moreover, having grown up very poor and gotten rich in one generation, keeping it intact for us and our kids is paramount to the strategy. It is a requirement.
So, a few years ago, I worked to really understand where everything was headed financially, and why. Tracking became crucial to this effort. I now have over two years of concrete history to work with and the insights have been amazing. I really enjoy doing it. It is at exactly the right level of detail for people in our position. It is not budgeting; it is “tracking for success” (tm?)
You would think things would be obvious at this income and spending level but the MINT tracking showed up many things that were actually quite surprising. To pick on three areas, spending on cars, food and home were far beyond what we expected. We made easy and specific changes to spending in these areas. As I said before, my spouse was totally on board and like minded. This is a prerequisite for success as many have pointed out before and at this level, you can have misaligned expectations just as easily with big consequences.
Rather than trade perfectly good cars, we just keep them now, paid for. We always purchased higher-end used cars (I suppose, a “good value” in relative terms). But we didn’t keep them long. Now, we just keep them. For the sake of argument, this cut $2500 of our the monthly expense line. $30,000 per year, reducing the need for retirement capital to create this expense funding, on this type of item alone, by nearly $1M. Amazing.
On food, far too much spending on eating out. And not the health level everyone wanted. We just changed it very quickly, swapping outsourcing for insourcing. Far more selective spending on eating out and better choices on food purchases and minimizing waste. Better health, more money in our pockets.
On the house, a smaller, simpler house that is easier and much cheaper to maintain, cheaper to heat and cool, and just simpler. Changes in this area drove an overall reduction in lifestyle and maintenance costs that is also palpable. You feel it and can see it on the bottom line with no loss of pleasure or convenience.
Thanks for sharing!
This is such a great example of why knowing where your money is going is vital to financial success. Once you had the data, you could make the needed adjustments and get where you wanted.
Bravo!
Just curioius, A) How do you have the energy to go out almost every night and B) What was the average dinner bill with I assume the whole family? $100 a night, $150? We have a large income and don’t go out nearly as much as others appear to go out during the week. I admit, we get lazy sometimes and the bulk of our eating out is more social driven than pure laziness/no time to cook.
I’d classify it as commodity-eating-out for convenience. Too much very average food at too high prices, over too long a period. Indeed, hard to escape for anything less than those prices and nothing to show for it.
Now we eat out much less, eat better and more selectively when doing so, and MUCH better and more selectively at home. A win-win.
Wow, so similar to my observations from mint. I’m 42 and my wife and I make close to 400k combined. We save a great deal but I was struggling as to why we don’t have more disposable income. Meals out, car payments and house, moreso costs of maintaining house, are the culprits. We’ve budgeted eating out, paid off cars but the house challenge is still there. Utilities, yard work and maid total about 1300 per month. That’s a huge amount of pure expense.
I find this commentary extremely helpful as I’m trying to figure out how to retire early.
I am amazed at the people that don’t use Quicken to track spending and investments. Mint doesn’t cover investments like I want.
If you’re spending more than $120,000 a year to require a $3million nest egg, hopefully you’re making a lot of money. It’s certainly doable to reach your (higher) retirement number, but you may not be able to retire in your 40s.
ESI, here comes a truth bullet…these posters who claim they can’t get by on less than $225K or $150K, or ‘ask’ if they can retire on $6 million or $3 million, all seem like they are humble-bragging. Really? They are smart enough to accumulate millions, and yet they can’t solve the math?:-) Okay…
My best friend of 35+ years has a NW of $2mm, earns $150K/yr, and is in line for a $5 million inheritance within the next 5-10 years. Every conversation, he tells me how he ‘can’t ever retire!’ and it is killing him! I will give him 2 minutes to vent, but eventually have to tell him to put the drama aside. He will start laughing, because he knows he is being ridiculous.
Yes, that may be part of it. It’s so ridiculous that it’s at least a possibility if not the main reason for asking.
It’s funny to read this today as I JUST had this conversation with an attorney friend of mine. He makes bank and is struggling to keep his head above water. He was looking for suggestions so I mentioned cutting a few obvious luxuries they are spending on (concerts, private school, insane house, country club dues) and he shrugged his shoulders as if they were minimal in comparison to the overall issue. Now, I don’t care what you do with your money, but to complain then immediately justify your high cost spending on non necessities seems to be the source of the overall issue. Some people get swept up in the lifestyle when their incomes go up, but at some point everyone needs to ask themselves what is enough? I am grateful to be on a lower retirement spending plan than 225k/year. It would take me decades of work to save enough! ?
I used to work at a law firm with an office in NYC. We had a a lawyer making $30K a MONTH base, not including his bonus/other payouts and needed an advance. Found out, his rent on his apartment was $10K, which, OK, is only 33% of your base income, but geez, where did the rest of the money go? Spending rises to meet income.
$30K a month after tax for a NYC lawyer is probably about $15K (based on what people say about NY/NYC tax burdens) so this guy needs to watch his spending. I know it sounds crazy, but he definitely needs to be in the “can’t have everything at once category” of consumers if he ever expects to be FI and retire.
30k a month in nyc is nothing!
You could just ask your friend if they have actually tracked where the money is going, as in honestly tracked every cent and not just the bills and major payments, for two or three months. While I thought I had a reasonable idea of my spending, I was actually surprised when I knuckled down and actually did it. The reason I suggest this is that if he’s shrugging off what he considers “small stuff” he may not be seeing the whole picture in that he may be dying the death of a thousand cuts since all the real bleeding in his finances may actually be all the small stuff he’s routinely discounting.
Actually your effective yield is more like 5.66% as you are pulling $85K out of a $1.5M portfolio, with the other half compounding by reinvesting earnings plus retained earnings of the business. Your real estate is absolutely killing it!
Private school for our daughter is having a negative effect on our budget so my family spending levels are similar to yours. It’s only a matter of time before we pull the FI rip cord.
-Mike
I hope you get to CO when you reach FI. Would be great to meet in person!
HI Mike, Agree with ESI, just always find myself looking for your comments. You have great insight. I’d definitely follow your blog if you started one. If I recall you were living in Asia (KL?), is that still the case? I just moved back to SIN myself. If you are ever around I’d definitely welcome the chance to meet up.
Hi MI#2- I am in BKK. If you are ever around drop me a line and let’s meet up!
-Mike
Since this is the first year (in a 28 year career) that I made six figures, it is hard to believe people spend that per year. I can’t handle it when people complain that they have no money and live paycheck to paycheck (and can’t ever imagine retiring.) It is SO easy to find information to help now, that it’s hard to have any sympathy. I realize it’s harder for some people to take action (and some have legitimate high expenses – medical, etc.) but cutting spending isn’t that hard. It’s also pretty easy to bring in money on side gigs – but then you can’t just go and spend it! If people are unwilling to change behaviors, they can just keep on going to work 😉
Good reading, ESI!
Jeesh! My Monday morning brain just got a whole lot more discombobulated. As I had noted over on the PoF site on a related post on the high cost of kids hindering your retirement plans, it is grim state of affairs. I’ll paraphrase what I said over there so as to not bore your readers:
“If one is inclined to raise kids with a mindset of “Hedonic treadmill” crossed with “Keeping up with the Joneses” crossed with “Fancy Toys R Us”, all on steroids, kids will eat your money as voraciously as they chow down that 6th slice of cheese pizza. Like long term treatment with high dose steroids, such a lifestyle will inevitably have undesirable side-effects.”
As a couple who have had tendencies in the past to be sucked into that lifestyle, it is possible to uncouple from it and adopt a more balanced approach to living. Our core expenses expect to run around $52K at FIRE next year (we have two kids, age 11 and 9) and we have plenty, plenty left over to fill with travel (copious use of travel hacking) and entertainment from our portfolio. Note – college savings (529 plans) is accounted for separately and we don’t count it in our SWR.
$2.3 million is my number and even that is likely a stretch of what I really need. We spend about $60K outside of our mortgage and that has been our biggest hinderance to FI. I know plenty of people that argue you can’t live on less. I am not sure what they are doing with their money, but I suspect it does not add much happiness to their life. $1.5 seems very doable to me and $85k is hitting it out of the ballpark.
$3M is 120K a year at a 4% withdrawl. I think many can do perfectly fine on that amount.
Its always the spending. No matter how much you make, if you let lifestyle creep get going, you will never have enough.
The key is that, as you get closer, you pay off debts, etc. – you should be dropping your expense needs, not increasing. Unfortunately, its rare to find in our day & age.
Mr. 39 Months
It seems like the majority of your income comes from your real estate holdings. Which makes sense since you can earn ~10 without drawing on any of your assets. So thought experiment – Is RE the best place to invest for retirement once you’re actually ready to retire? At least in terms of being able to create the most income without selling your assets? Am I thinking about this right? Realistically the most you’re going to get from dividends is ~3-4%. So invest in stocks (low cost indexing) which will grow at 8-10% per year then convert to real estate where your income can be much higher? Does that make sense? Or you could just invest in RE from the beginning and keep re-investing your income until you retire and need the income.
“So invest in stocks (low cost indexing) which will grow at 8-10% per year then convert to real estate where your income can be much higher.”
This is exactly what I did — and would do again.
I was helped a lot by 1) the market downturn (able to buy RE cheaply) and 2) living in a low-cost market (if I bought the places I own in MI here in CO they would be twice as pricey and the rents would be nowhere near double.)
Do you think there is any value in investing in real estate earlier in the cycle? If nothing else for more experience when you’re ready to move over more of your assets?
Yes, that’s one thing I would have done differently — start sooner.
That said, you might not be able to find as many (or as good) deals as I did because I timed the market, but as long as they are “decent”, I would probably get started earlier if I was to do it all over again.
I don’t know what I would spend on beyond a certain point. I feel like we live a pretty luxurious life and we spend around 50-60k/year and that includes the mortgage (though we’re in a fairly low cost of living area). And we take vacations, have new(ish) cars, kids, medical expenses. Granted, we could easily spend a little more and not have to watch spending so closely. But I think it would make me crazy to try to keep up with 225k in spending – to me that’s even more “stuff” to take care of.
I always wonder if I lack imagination when someone says something like this as I can’t even imagine spending 200k a yr. It really is the spending.
I so agree with whoever said that when you lose the payments, your spending goes down dramatically. I think most people have the mindset that payments are forever (cars, mortgages, etc.) versus thinking about how much less they’d need to spend if they pay everything off.
And yes, it seems like big spenders do not understand that a millionaire is made $10 at a time. The devil really is in the details.
Logic along these lines reminds me of our members of Congress who won’t cut this or that program, or increase taxes on the likes of Warren Buffett, because “it really wouldn’t make much of a difference, overall.” It’s the reason we never make any progress nationally on our massive deficits – and why some people who are living high on the hog can’t see how cutting back here and there will make any difference at all. They want life to be completely free of all conflict, compromise and pain. Then, there’s the John D. Rockefeller mindset. When asked, “How much is enough?” he replied, “Just a little bit more.”
I am not sure where I heard this but you just reinforced this idea.
If someone needs to ask “do I have enough money to retire” they usually don’t. They do not know what sort of income they will need to retire to cover there expenses, they have not sat down and figured out how they will retire and have not educated themselves of potential problems or alternatives.
One thing we all have in common is none of us are guaranteed tomorrow and life is unpredictable. A lot of folks assume they will have more time, they will be able to work as long as they want, they can cut expenses when they really need to, etc. And then life happens, a layoff, a death in the family, a business or investment goes bad, an illness, kids move back home, parents need help, etc.
Just to be a bit provocative, maybe we worry too much about when we can retire when we really should be worrying about how much we need to have in the bank if “life happens” and our circumstances change. I would worry more about raising a “just in case” fund than I would an “FU” fund, you know, how much do I need to just tell my boss “FU” I’m out of here. And I’m not just talking about an emergency fund; I think I’m talking about a “catastrophic” fund. Knowing I’m just as prepared for the unforeseen is as important as knowing I can retire by a certain age because in most cases, the unforeseen comes first.
Maybe it is just me and some of the more recent life experiences have me thinking a little differently but I just felt compelled to throw it out there as food for thought. I know it’s a lot more fun to talk about “The Number” and when we can let loose of our work responsibilities and just start enjoying life full steam, but I think there are some other elements of life and finances worth pondering.
I totally agree with you. We get too involved in the future. A future that is uncertain and not promised. Through a lifetime things rarely go as planned. Most times it is not if something goes wrong — it is when it goes wrong. I have tried to have a “what if fund /catastrophic fund”. Being financially prepared for problems can make the difference between losing all assets, filing bankruptcy or ever being able to retire.
Also, it does not matter how much money you have in many ways. You can only live in one room at a time even if you own a mansion. You can only ride in one car at a time even if you own a fleet of cars. You can only wear an outfit at a time even if you have a hundreds of outfits. Each individual has to decide what is enough. I have found you rarely “need” as much as you think.
Our future involves lots of travel as we are still relatively young (in our early 50’s), and we won’t be able to do what we want if we hadn’t saved a ton of money. Yes, we can retire now, sit around and do one or two vacations a year for maybe a few weeks at a time, but we want to stay overseas or another part of the country for 2-3 months at a time and that will require a good nest egg. We should be fine, but we aren’t aiming for $10M before we retire.
Hi Jeff B, that is my number as well, excluding home equity. I’d like 10M+ in invested assets to be working for me while I’m in retirement. If we stay on track, we are about 7 years away and about the same to pay off our mortgage. I’m older than you so that would put me at 67. If I hang it up before then, I’m ok with wherever we are at that point because it should be more than enough to live like we want and still leave a nice cushion for our daughter at some point.
This is all too true. Recently, our high-rise condo building had a fire alarm system that needed to be replaced – out of the blue. The cost per unit, based on square footage, is five figures (HOA – special assessment). It’s not a banana peel that a retiree wants to slip on. This expense would wipe out most emergency funds – and then some.
I made a few life choices and lifestyle choices that not everyone would agree with or duplicate. But my second marriage is wonderful, we have three kids with debt-free college degrees (and a fourth 1/4 of her way through), a wonderful home I designed with a large basement woodshop to feed my retired dreams, and a significant nest egg to let us retire financially worry free. ESI and I share Pikes Peak’s wonderful environment and proximity to Denver so I don’t feel a need to retire elsewhere. My point? I calculated our cost of living in retirement as we want to live, and we ensured we would have the resources to do it–even under some worse-than-worst-case scenarios. Yes, it’s too late for me to retire at 45 and claim early victory, but the things I’ve done since then reward me in even greater ways, and they were worth the delay. Since my party starts when I get there, I’m right on time!
I too agree that $85k is a decent amount of money to live on in early retirement. By keeping your expenses low, your net worth will compound nicely in your retirement accounts. You are doing a masterful job with all of your income sources.
Wow, $3 million isn’t enough for most people? I think you’d do pretty good with $1 million bucks, particularly since anybody who has earned and saved that much money is unlikely to sit around doing nothing of economic value. Look at you – you’re retired and earning money from blogs. Clearly you’re not doing that to ensure there’s food on the table.
Glad to hear that you’re pointing out they have a spending problem.
It’s interesting how people can overspend any income. I’m sure there are some folks for whom $10 million wouldn’t be enough to retire on. After all, if you spent $1 million a year it would only last 10 years. People need to keep lifestyle inflation under control, like you have, in order to have hope of retiring on any amount. Great post!
There are athletes everyday that go broke having made over $50M dollars.
Actually at 6% you’d last about 15 years. If you cut your spending by 20% to 800K per year you’d last about 23 years
ESI,
Thank you for giving me something to aspire to i.e.
– $85K/year w/ no mortgage (and not $40K)
– Includes $10-15K in travel
– Rental income to the tune of 60k/yr
I plan to get there, I will get there. I’m just shy of $100K/yr in expenses with a mortgage in a HCOL area. Rental properties are the unknown factor but I aim to get started in the next 12 months.
What is your real estate portfolio like?
$60K as net income is pretty darn good.
https://esimoney.com/financial-details-of-my-real-estate-investments/
How much do u pay for your medical insurance? That is my main variable amt to plan for
https://esimoney.com/picking-right-early-retirement-health-insurance-reviewing-options/
Once you start getting into the 6 figure spending there are a lot of slippery slopes that suddenly appear. Life is all about trade offs and opportunity cost. 80-120 is a pretty sweet life almost anywhere in this country save for the absolute extremes.
I can see if some travels extensively they might want 100-120K. That’s our number and in line with others in my position (Dr. Curious for one). 225K seems huge. I doubt its all discretionary; likely that money is committed already. FIREcalc has a great link that allows you to input you costs of living in various categories. One can change the number from what the baseline retiree spends and adjust up or down accordingly. Check it out. http://www.firecalc.com/real-cost-of-living.php
Some data (daniel kahneman) shows that some measures of happiness plateau after 75K. The vast majority of people in that study were likely working and had a lot of non-discretionary commitments to income. So someone that retires early with minimal debt and needs 225 discretionary might not be getting much value for all that extra. My wife and I talk all the time that we’ll probably have a hell of a time spending 120K, it will actually be a huge lifestyle boost just to spend that much. More likely we will live it up for a few years then drop down spending and donate the balance. We will likely each also work part-time anyway (like 1-2 days per week) so that alone might cover costs.
I think what area of the country you are in is a big part of the difference in cost of living expectations. My mortgage is paid off, no car payments, live in a modest home, but I’m in San Francisco. My cost of living for a family of 3 is over 100k for a pretty basic life. I self-insure for health insurance through Obamacare with high deductible and no subsidy, that’s 20k a year right there. My property tax is 11k. Daycare tuition for no frills facility is 18k. Food costs 15k and we eat out maybe once a week. Then there’s homeowners insurance, earthquake insurance, auto insurance, dental, vision, utilities (water here is crazy expensive), fuel, cell phone, charity, it all adds up pretty quick here. I cut my cable subscription.
I am early retired, but I think 3m would be tough to early retire (kid expenses still ahead) around here without occasional anxiety.
I was going to post what Joe wrote but I will just jump in to say that everything he says is true! San Francisco is not like other parts of the world. With only $3M in liquid assets plus another $4.6M in rental real estate (on top of our primary residence now worth close to $2M), retirement in this city is a very long way off.
We have $163,000/yr in rental income alone but ALL of that is consumed by 3 mortgages (ranging in interest rates from 3% to 4.5%), $35,000/yr in property taxes, landlord insurance, maintenance, management fees (very small), occasional vacancies and on and on.
We’ve started writing second mortgages to get yield (10%-18% interest rates on short term asset-backed loans). But it is not enough. We both still work full time earning low-6 figure jobs (gross income around $400k/year, $560k/yr including rents collected). Our newest car is a 2008 model.
I think retirement at 70 is possible assuming steady rent growth and full amortization of the underlying mortgages on our real estate portfolio. I thought I would be retired at 40 but there is no end in sight around here. Just a few more million … and I’ll be free!
Can’t quite tell what your current age is (…thought I would be retired at 40…) but, regardless of how nice the San Francisco area is, is it really worth another ~25 years of your life trying to save to retire at an age (maybe 70) where you probably won’t be able to enjoy life nearly as much as if you retired NOW? Assuming that you have some (lots?) of equity in your $6.6M in real estate, plus “only” $3M in liquid assets, you have the assets to retire wonderfully in many other beautiful parts of the country that haven’t gone off the deep end in terms of cost of living. Obviously, your personal circumstances may prevent you from “easily” being able to move, but please don’t end up being a mortality statistic just trying to save for one more year. Think about it…you’ll never have enough.
Here I am writing a post this week on how you don’t need a million dollars to retire and I find your post 🙂
If you live a basic lifestyle, you probably don’ t need $1M, but it can’t hurt.
My dad at 81 is living just fine with his SS and RMD and has $400K in investments. His rent is $1,200 with expenses being $2K and he has about $3K coming in from SS and pension. You can live on a small budget and be just fine.
I am 52. I was lucky (frugality helped) to save a corpus of $2 M. Would love to retire at this point. With conservative 3.5% rule, I will be able to withdraw 70K annually. This is adequate for us. However I am worried about health insurance cost. Currently we are insured under employer health insurance coverage. If I retire we have to buy our own insurance at least till I reach 65 when I qualify for medicare coverage. Some blogs say we need at least $24K annually to cover cost of health care for a family of 4. This scares me. This screws my calculations for retirement. Any thoughts on this?
Until you actually price it out, you won’t know. It might only be $15K a year. With $2M growing assuming you aren’t too conservative, $100K a year would take you to 72 with zero growth. You get SS in your sixties.
I am 24 and was calculating how much I will need for retirement if I want to survive with an 80000 lifestyle and 70000 lifestyle. I calculated different numbers with 5%,4% and 3.5% inflation and if the best case scenario…I would run out of money by 79 or 84 depending if I retire at 60 or 65 and if the inflation is only 3.5%.
Basically, if I were to save 2 million dollars in retirement I would be broke in by 79 or earlier. Worst case scenario, I would be broke by 76.
Any advice on how to have secondary income in retirement to make sure I don’t run out of savings like projected?
$2MM using the 4% rule is $80k; 3.5% is $70k.
So if you can live on $70k, looks like $2MM is enough…
And here’s an article that can help if you want to make more:
https://esimoney.com/side-hustle-business-can-get-financial-independence-10-years/
I think you are a bit young to know if you will run out of money at 79. You might save a bunch more money or learn you don’t spend as much as you think when you get older. The beauty of having $2-$3 million is you can spend some of the principle or just cut back on certain things when you get older. Nobody knows what the world will be in 20 years, let alone 50.
I retired at 52 ( 5 years ago ) with a net worth of 3.2 million ( 800k of that is tied up in home equity) We live in Montana ( low cost area ) but rent a VRBO in Arizona in the winter ( 10k). We have no kids so no education expenses. Unfortunately the stock market ( and bonds ..2006-7 was a disaster) has not been kind and we are carrying forward 130k in capitol losses. I am not going to lose more money in the stock market or the money will not be enough and I will be working at Walmart. We have spent an average of 70k a year but no one here is talking about the skyrocketing costs of health care. We are now spending 20k a year just for our premiums ( thanks Obama) and that needs to be addressed here if you retire before medicare kicks in. I feel like I am starting to pinch pennies to keep our spending down but other friends of mine who are probably have about the same money seem to be spending a lot more and going on lavish trips and driving expensive cars. I am finding it hard to come up with a real budget where we can enjoy our hard earned money. I do have a pension income of 56k gross so that helps.
You can spend $100K a year for the next 32 years and not run out of money and 56K of that is your pension. I assume you sold during 07-08 to incurr 130K in losses? 130K out of 3.2M isn’t that much of a loss. Down markets are temporary. Have cash to ride out down years.
Unfortunately my market losses are not only a result of the mortgage meltdown in 2008. I lost money in the .com bust in 2000 and all along the way to now by trusting several “financial advisors” ( aka crooks ) all along the way. I had money in the markets even when things were going up but most of mine went down. Bad luck and worse advice. Also lost 300k on a house I overpaid for. Thanks crooked mortgage lenders and Fannie and Freddie Mac. Got screwed there too.
Part of our 3.2 million is 800k in home equity. Not sure if that counts towards total net worth or not. We will probably have to sell and downsize and end up with no mortgage. Right now that is our only debt ( 355k) I’ve got roughly 2.5 million and 2 million of that is liquid. If I divide that by 30 years ( gets me to 87 but my wife will only be 77) it comes out to 83k a year that we could spend till it was done. That does not take into account inflation ( who knows) and upcoming social security ( will be about $2500 ) in 5 years if I decide to draw, it then more if I wait. This last year we spent over 160k. Got hit with some big bills that were not expected like a Angiogram that cost 6k ( deductible is 6k on our policy so it was not covered ( thanks Obama) and some high dental bills and a few other things. Budgets are great but there is always the extra unforeseen things that happen. I know .. keep a separate amount aside for “emergencies” but that negates the whole budget strategy and its still money out. With about 80k in annual income ( pension plus bank interest) I think we will be ok but it is feeling a whole lot tighter than I thought it would be. we drive modest paid for cars and do not spend a lot on trips or luxury items like jewelry and watches.
Thank you for the response.
Real estate is very hot right now, why not downsize now instead of later. No sense sitting in what must be a huge house if you are worried about money. With a pension and social security to come, seems to me the house is what is likely weighing you down. Since 2008 the market has been on a tear. I didn’t match the market with my returns (going to switch to vanguard index funds for the future) but all of mine went up especially in the last 5 years. Best of luck.
If real estate goes down, his next house will be cheaper as well. You can’t time real estate or the stock market short term.
I fully understand anxiety around this issue BUT
1. All will be OK
2. Anyone who at 52 that has accumulated 3m and is conscientious about this enough to still post here will not have any problems
3. Write down everyone you know or that anyone else has known who has starved to death
4. Stop concerning yourself with this. As stated above you obviously will make the proper decisions based on past experiences.
5. Most probably you will leave too much and deny yourself things you would have enjoyed.
6. Now start living and congratulate yourself. This is something to celebrate and not fret over.
7. I am writing this for myself really. I have invested a significant amount of my earnings in the past and retired at 55. Actually with my investments, my net worth has increased since retirement. But like you I can worry too much. These comments were in no way intended to offend you.
8. Always refer to #2 on this list from time to time.
good advice. I was just messing with a retirement saving calculator I was thinking… if we change this or that we can invest this much and possible have several million at retirement. Then I thought.. as long as we save enough to me more than comfortable then why not enjoy some before then also.
last I checked life isn’t a contest to see who can retire with the most millions. So instead of worrying about It, I decided to shoot for 6 mills and see how it goes. I think anything over 3 will let us live pretty comfortable in retirement. Maybe we will run into trouble if we live to be over 100… I’ll worry about that later.
we are very happy and comfortable. Our spending on wants and needs each month is about 3000. But if we had to we could live on less. a lot less.. We could also spend more.
Seems like I am going to be forced into early retirement at 51 with a bit over $2 million in investments (no debt). My fixed costs are around $2500/mo. I’m trying to do 3.6%, $6000/mo, but I’m easily spending the other $3500 to stay active and happy. It’s really stressful. I would have been happier with another million or so.
I retired at 45 right before the great recession. Although my portfolio took a substantial hit and I blew through a lot of cash, I stayed the course and my investments have come back exceeding inflation by a wide margin even with my withdrawals. I have been preparing for the next downturn or the possibility of high inflation by shifting some of my equity growth into shorter duration high quality assets. My advice to anybody nearing retirement is that they learn how to manage their own money even if they use what they consider to be a trusted investment advisor. One more thing, there is no such thing as retirement, you just find a new purpose in life. Hopefully, one that is more meaningful to society than the one that you left because chances are if you are able to retire early you probably have some bad karma to make up for.
Coming across this article makes me wonder if I can still retire at age 50 (currently 48) with just over 3 million net worth. Current no bills and a steady rental income. Colleges for kids covered by 529 and I manage to save over 100k a year of my salary from work and nice returns from invesments that is above my rental income. Reason for my doubt, is insurance and uncertainities. All online calc, advisors, and my own projections say I’m good to go, but still cautious. Btw, i would expect annual 70k in bills alone once retired with adjusted inflation of 3% a year.
Your numbers are close to mine (age too).
Depends on 1) what you think you’d spend in retirement and 2) income you’d generate and/or assets you could draw from.
$3 million at 4% withdrawal is $120k, BTW. If $70k is what you’d spend in retirement, seems like that leaves you plenty of margin for error.
Unfortunately 70k covers just regular bills such as insurance, taxes, prop mgmt, etc… Food should hover around 24k a year. According to the math, if I retire end of this year, I should have 100k a year to spend, but end of next year 108k and so on in those increments.
I’ve beem debating to pull the trigger sometime next year when Im 49, but may wait until kids out of college a few years from now. Also SS looks at 35 years of income, so retiring too early may be a disadvantage.
My numbers used. Outside of rentals, Inflation 3%, cash investment returns 4-5% returns. Does this sound right?
How many people are you feeding? $24k a year for food is very high.
$108k versus $120k withdrawal is pretty close. Will you have any sources of income at retirement (side hustles, dividends, rental units, etc.?) I personally would want something else to give me a bit of cushion.
Just curious what do you guys think would be a conservative number for the following:
Inflation, market return, savings CD.
Currently I have it at inflation 3%, market return 5%, CD ar 2%.
I also estimate about 15k a year for health insurance.
It’s really up to you since these are nothing but estimates. Pick numbers you feel comfortable with and can live with and you’ll be good.
The numbers you have here seem fine to me. Healthcare could be the wildcard depending on what service you go with.
I have my market returns at 8% (getting almost 11% over the last 10 years) and inflation around 1.5% Savings in cash will flucuate over the years.
My 10 year returns stand at 13% right now. I am pretty happy with that.
I wouldn’t count on much SS if you aren’t going to take it for 15 years. It will be there, but it will be a bit less. I think most of us are going to overestimate medical insurance.
Just my wife and I. I do have rentals which will be more than enough for the 70k bills. Rest of draw will be from cash investments and eventually leading into 401k. I do plan SS, but not until late 60s, but its only a fraction. Again, i planned for 3% inflation, so for instance, 1st year retirement at 100k then following year at 103k and so on until age 90 (crazy $$$ number). However using 3% eats quickly into cash investments at 4-5% conservative returns (currently higher %). I do have a realtor lic (part-time) which i have been using past 15 years to feed my kids 529, now i can use for backup during retirement. I feel something is missing, hence my post here.
The fallacy of the 4% rule is that it doesn’t take into account the risk that you will retire at a time when the market is falling. To use one example, if you retired during the boom years between 1980 and 1990 versus retiring during the choppy years of 2007 to 2017, and started out with the same amount of $1 million, and withdrew 4% each year, the difference between what you’d end up with at the end of the decades is more than 20%. That could make the difference between a comfortable retirement for the remainder of your golden years and one in which you have to count every penny. Luck matters a lot. Timing matters a lot. That’s why many economists have discarded the 4% rule as being, believe it or not, “too aggressive” or “optimistic” The better rule is to stay close to 3% or even 2.5% to “almost” guarantee that you won’t run out of cash before you meet your Maker.
This is called sequence of returns risk and we’ve discussed it elsewhere.
This is why many retirees retire with 1-3 years of cash set aside to cover expenses — then they don’t have to worry about withdrawing in a down market.
Even if you retire in a down market, you are still only taking out 4%. It’s not like you are taking out a static amount of say $50K a year. Having $1,250,000 at retirement and having two down years with the portfolio going to $800K means you can still take out $32K. The markets has rarely been down over a 3 year period and then has gone up and past the past high levels. The only down choppy years were 2008-2009. What was choppy about 2010- until now? Bull market going for 12 years now. 1% withdrawal isn’t going to make that much difference. If the market is down, then take out less. It isn’t an ironclad law to take out 4%. But like ESI said, have cash to make up the difference.