Updated: Mar 5, 2022
In this week’s financial section, we wanted to highlight some listener feedback. We have received some great comments in the last several months and thought these were definitely worth sharing since we haven’t covered any as of late. These actually go a bit hand in hand.
The first comment we will read is from our recent Podcast Episode 59, Change The Fire Movement to Financial Independence Side Hustle, and our listener Frank in Illinois commented:
He wrote: “If you two are considering the FIRE movement and think you could even retire at 55 with $1 million dollars, you should talk to people who are older and in retirement and get yourself a dose of reality. In today’s money you could wipe your butt with that if you don’t have employer sponsored insurance, and if you don’t live to 90 and don’t care if you live in a tiny house with little expenses.
Not to mention, no travel and unforeseen costs/issues. This is so far from possible in my opinion. Can you talk about the fact that there is no way to fully retire on that with all life’s variables?
Frank, we are not considering this at all for all the reasons we talked about in the two episodes; however, we will address your comments by providing a base scenario to give a little insight on investment allocation, time horizon and inflation.
Ok, so let’s use Dave, a 40-year old single man who was a FIRE seeker and has $1 million in the bank and is feeling ready to retire. This is based on a monthly budget of $48,000 a year, which is minimal. This is a very frugal lifestyle.
Let‘s say he lives to 85, totally plausible (the average life expectancy is 81). So using straight math, if he has this in cash to preserve capital, he would need $2,160,000 to survive on $48,000 per year for 45 years.
In our opinion this will not be enough of a nest egg, without further investment. This takes into consideration that fixed income rates are returning very little return at this juncture. Therefore, $1 million would be depleted in 20 years at age 60.
Let’s say he chooses to invest with a 50/50 allocation, taking half of the million, at an average return of 6% over the next 10 years, and saves $500,000 in pure cash to live off a fixed budget for the next 10 years.
As for the invested $500,000, it would turn into roughly $983,000 based on a S&P high quality type of index portfolio with relatively low risk but focusing on a diversified portfolio consisting of value and reliable balance sheets to provide dividend income.
So this is great; however, you have to consider inflation at a 2% clip, and if David plans on taking 4% annual income from his investments, (the industry standard) the return has to be no less than 6% to meet the goal. This is critical because in 10 years his cash reserve will be depleted.
The question is, can David repeat the process and reinvest half of his $983,000? Absolutely! Keep in mind that the market will suffer changes and the closer he is to dying by 85, his risk factor goes up of not retaining his retirement nest egg.
The point to remember is that when people retire, they may not invest their money, and if they do, it is on a very conservative basis. The pathway is err on the side of capital preservation.
In closing, can people like David live on $1 million for 45 years? Yes! However, it comes with many caveats that include inflation and market conditions. This does not account for a reduced social security benefit and other factors such as healthcare/health problems, unexpected life challenges and major events such as a wedding. The bottom line is this is a highly risky path to remaining retirement in the long run.