No, I didn’t read the article, Can You Really Retire With $5 Million?
I know inflation is an issue.
But seriously?
I guess the Can You Really Retire With $1 Million headline wasn’t attracting too many clicks anymore.
AW
https://finance.yahoo.com/news/retire-5-million-204922734.ht…
If you’ve got the resources to accumulate 5 million, you’ve likely been a high earner and likely a big spender. Few are going to reach 5 million making $80,000 a year and saving $20,000 a year for retirement.
As to the article, it’s basic principles. Do a budget. Live by the budget. Don’t assume that you’re a multi-millionaire, you can spend like someone whose income is a million dollars a year.
And…most of all, don’t get sucked in by a financial advisor who will take 2% of your assets per year for ‘managing’ your money. That only leaves you with 2% of your 4% withdrawal to actually spend on your own.
Figure out what you’re spending. Do a budget. Downsize if you must.
Geez, $200,000 before taxes, inflation adjusted for 30 year SWR, is so hard to live on these days. (could be if you had a $300,000 or $400,000 combined income and spent most of it.)…
t.
The 4% SWR suggests $1M would throw off $40,000 … BEFORE taxes.
$40k don’t go too far, but it goes pretty fast?
4% of $5M is $200,000 annual distribution, which after taxes might support me in the style I desire?
Before 2021, I personally put MY doable FI threshold at a minimum of $3M ($120,000 before taxes) for a minimum FI retirement. Inflation suggests a reassessment?
The first sentence of the article says that while $5M may be a significant sum - to retire on $5M still requires prudent financial choices.
I agree with that premise.
ralph
Geez, $200,000 before taxes, inflation adjusted for 30 year SWR, is so hard to live on these days. (could be if you had a $300,000 or $400,000 combined income and spent most of it.)…
Imagine the plight of poor Jamie Dimon, trying to scrape by on only $30M a year. Fortunately, the BoD gave him an $80M payday last year, for him turning in below industry average shareholder returns.
/sarcasm
Steve
I have never understood article’s like this. They ignore Social Security. They ignore pensions. They are assuming a one legged stool. Who is the author’s intended audience? Is the purpose to enlighten or to enfrighten?
Few are going to reach 5 million making $80,000 a year and saving $20,000 a year for retirement.
If you save $20K/yr and do it every year and get an average return of 7.6% you’ll hit $5M in 40 years. Inflation and pay changes not considered.
If you saved twice as much for the first 10 years, then dropped back to 20k you’d have $7.5M
But even more amazing, if you saved $40K for 10 years, then nothing for the next 30 you still have over $5M.
The hard part is saving those first few years when your salary is lower.
Mike
I have never understood article’s like this.
Exactly. A 4% withdrawal from 5 million is 200,000 a year. With the exception of the handful of very highest cost locations in the US, you can live just fine on that. And in many places, you can live quite well. Don’t forget that this 4% withdrawal rate can be adjusted for inflation as time progresses. So it’s not like you have to live on a mere 200 grand 30 years from now.
Who is the author’s intended audience?
I’d love to answer that, but my answer would be entirely political. So I won’t even attempt it.
Is the purpose to enlighten or to enfrighten?
My vote would be for scare tactics.
–Peter
“If you save $20K/yr and do it every year and get an average return of 7.6% you’ll hit $5M in 40 years. Inflation and pay changes not considered.”
Inflation is going to make a lot of difference. That 5 million might be worth the equivalent of a million or less if we keep having 8-10% inflation. or even less.
Most folks looking at retiring today, making $80,000 a year now, were likely making $10,00 or 15K a year 50 years ago and not able to save $20K/yr back then - or most of the time employed, reaching 60… with a lot less than 5 mil.
In 1968 I started work at $9250/yr in an engineering job. By 1999, I was making $88,000 a year. Then retired early. In 1968, the only IRAs were limited to bank CDs. Stock accounts had significant fees to buy and sell stocks.
That was through several recessions, the stock market tumble in 1973/74, the high inflation from 1977 to 1983 hitting 15% 30 year bond rates…
Been there - done that… but I guess there are Google engineers making $250,000 a year in CA and paying $4000 a month rent…and paying lots of taxes…
Oh, and if much of that 5 million is stashed in regular IRAs, you gotta pay a bunch of regular income tax on it when withdrawing it.
t.
“Who is the author’s intended audience?”
There probably are a million people with assets with no clue on budgets and spending and how to withdraw savings in retirement. They are excellent suckers for high cost financial advisors willing to hold their hand.
Look no further that at least have the ‘sports stars’ who make million dollar salaries - or tens of millions…and once their career is over, wind up bankrupt in 10 years.
Lots of others have been stashing money in IRAs for decades but have no clue how to budget, not overspend. wow…millions of dollars - we can live it up!
Most here understand the 4% rule…but many with millions don’t…
t.
When and how did the “4% withdrawal” become the MAGIC number? Why not 5%? Why not 3%?
Is a 4% withdrawal at age 60 with a port of $1 million the same as a 4% withdrawal at age 90 with a port of 20 million?
Please don’t fall in love with magic numbers! Imagine a store where all the shoes are size 45! I’d be happy. You?
The Captain
has been withdrawing well above 4% for over a decade
Yes cost of living is higher. We all know and feel that.
BUT - take out extremes - ie the lottery winner or pro athlete who from birth were taught to wear 100% of their net worth…
I strongly feel that anyone with 5 million …KNOWS full we all that it’s quite easy on even a bad day ,to retire with 5 million. Odds are they weren’t buying the hairstyles, handbags, and designer stuff…that we depend on …well…the non wealthy to consume. Sure some of them were ultra high earners, some were inheritances - but many many many of them are people who did right things, worked hard, had some luck - - but saved and invested wisely.
I think you are right - headlines like that are all for clicks.
has been withdrawing well above 4% for over a decade
I don’t know what percent of my portfolio I withdraw. I take 90% of my dividends, reinvest the other 10% and get a pay raise every month.
I don’t know what percent of my portfolio I withdraw. I take 90% of my dividends, reinvest the other 10% and get a pay raise every month.
Sounds like a smart move!
The Captain
“When and how did the “4% withdrawal” become the MAGIC number? Why not 5%? Why not 3%?”
Long time ago.
The famous Trinity Study and others analyzed portfolio returns over 30 year periods to determine the appropriate ‘safe withdrawal rate’ from a portfolio that was 50% bonds/50% stock index.
They produced ‘curves’ showing the max rate you could safely take with high probability and survive ‘the worst 30 period in history’. Thus the 4% rule was hatched.
You can do your own analysis using FireCalc and other financial planners.
If you are living off dividends, they are typically 2-2.5% of their value, so you are likely taking less than 4% a year from your portfolio if all dividend paying stocks.
If your time horizon is shorter than 20 years, then you can take more - like 5%.
Put another way, if you don’t spend about 4% of your assets, your heirs likely will after forking over a chunk to the IRS/states in inheritance taxes on estate if it grows too big.
Otherwise, your heirs will get to spend it.
t.
t
Long time ago.
The famous Trinity Study and others analyzed portfolio returns over 30 year periods to determine the appropriate ‘safe withdrawal rate’ from a portfolio that was 50% bonds/50% stock index.
Thanks for the info!
1998 is not all that long time ago!
Trinity study
In finance, investment advising, and retirement planning, the Trinity study is an informal name used to refer to an influential 1998 paper by three professors of finance at Trinity University.[1] It is one of a category of studies that attempt to determine “safe withdrawal rates” from retirement portfolios that contain stocks and thus grow (or shrink) irregularly over time.[2]
“The 4% Rule” refers to one of the scenarios examined by the authors. The context is one of annual withdrawals from a retirement portfolio containing a mix of stocks and bonds. The 4% refers to the portion of the portfolio withdrawn during the first year; it is assumed that the portion withdrawn in subsequent years will increase with the consumer price index (CPI) to keep pace with the cost of living. The withdrawals may exceed the income earned by the portfolio, and the total value of the portfolio may well shrink during periods when the stock market performs poorly. It is assumed that the portfolio needs to last thirty years. The withdrawal regime is deemed to have failed if the portfolio is exhausted in less than thirty years and to have succeeded if there are unspent assets at the end of the period.
https://en.wikipedia.org/wiki/Trinity_study
The 4% rule sounds like a variation on the Kelly Criterion (1956), the max you can bet without going broke.
Kelly Criterion
After being published in 1956, the Kelly criterion was picked up quickly by gamblers who were able to apply the formula to horse racing. It was not until later that the formula was applied to investing. More recently, the strategy has seen a renaissance, in response to claims that legendary investors Warren Buffett and Bill Gross use a variant of the Kelly criterion.
https://www.investopedia.com/terms/k/kellycriterion.asp
The Captain
Denny When and how did the “4% withdrawal” become the MAGIC number? Why not 5%? Why not 3%?
AFAIK, 4% was not and is not recommended as a magic number.
It’s a guide, a useful Rule of Thumb for planning.
As such (a Rule of Thumb) it’s not a hard number, and sometimes 3% or 5% (or 1% or 10%) is a better “fit”.
It’s just a starting point for planning.
As a Rule of Thumb, IMO, the SWR, that each person uses, MUST have error bars on either side.
So I agree: don’t fall in love with magic numbers!
I wrote that a 4% SWR on $1M is $40,000 before taxes.
If the portfio is the ONLY income, then that’s a rather mean buying power. Personally, I don’t want to live on $32k/year, as my sole spending power.
4% SWR on $2M is $80k before taxes, and ABOUT $65k after taxes. Incidentally $65k is ABOUT the median family income a couple years ago.
Income and Poverty in the United States: 2020
https://www.census.gov/library/publications/2021/demo/p60-27….
Median household income was $67,521 in 2020, a decrease of 2.9 percent from the 2019 median of $69,560 (Figure 1 and Table A-1). This is the first statistically significant decline in median household income since 2011.
With a $2M portfolio, one could almost equal the median family income, using a 4% SWR?
4% SWR is a useful planning tool.
ralph
AFAIK, 4% was not and is not recommended as a magic number.
It’s a guide, a useful Rule of Thumb for planning.
As such (a Rule of Thumb) it’s
Now that I know where the 4% number came from (thanks to telegraph) I can relate to it but when used like the article that started this thread, it IS a magic number – or click bait.
Can You Really Retire with $5 Million? Yes, Here’s How
I can not only retire on $5 Million but start a charity and have some left over! 
Since 1971 the S&P 500 has delivered a CAGR of 7.65%. By taking out 4% per year by 2042 the port will be worth $9,645,25. Put half in bonds and you are shooting yourself in the foot. Just put the $5 million in an S&P 500 index fund.
The Captain
**Year Portfolio Withdraw Gain**
**4.00% 7.65%**
2022 5,000,000 200,000 4,800,000 366,985
2023 5,166,985 206,679 4,960,305 379,241
2024 5,339,546 213,582 5,125,964 391,906
2025 5,517,871 220,715 5,297,156 404,995
2026 5,702,151 228,086 5,474,065 418,520
2027 5,892,585 235,703 5,656,882 432,498
2028 6,089,379 243,575 5,845,804 446,942
2029 6,292,746 251,710 6,041,036 461,868
2030 6,502,904 260,116 6,242,788 477,293
2031 6,720,082 268,803 6,451,278 493,233
2032 6,944,512 277,780 6,666,731 509,706
2033 7,176,437 287,057 6,889,380 526,729
2034 7,416,108 296,644 7,119,464 544,320
2035 7,663,784 306,551 7,357,232 562,498
2036 7,919,730 316,789 7,602,941 581,284
2037 8,184,225 327,369 7,856,856 600,697
2038 8,457,553 338,302 8,119,251 620,759
2039 8,740,010 349,600 8,390,409 641,490
2040 9,031,899 361,276 8,670,623 662,914
2041 9,333,537 373,341 8,960,196 685,053
2042 9,645,249 385,810
If you invested in the SP500 in 1966,
the real return on your investment for the next 20 years was ZERO due to inflation
https://awealthofcommonsense.com/2014/06/1966-1982-stock-mar…
While the SP500 delivered 6.8% annual increase, the average inflation was 6.8%.
IF you were withdrawing 4% a year, inflation adjusted, after 20 years…well…
and most of that gain came from re-invested dividends. (in a taxable account, you’d pay tax on that gain each year too!) making your return even less.
–"Many smart people in the industry are predicting lower investment returns over the next decade or so. Who knows what will happen, but it makes sense to prepare for that possibility.
One of the most interesting scenarios over the next few years would be if the economic recovery really takes off, the job market improves and wage increases ultimately cause lower stock market returns. In that situation everybody is confused and many investors are left extremely frustrated.
We’ll never see another environment exactly like the 1966-1982 period, but we will definitely see periods of underwhelming market performance. "
same link
If the tax bill passes, corporations will pay more taxes, and have less to pay out in dividends or dividend increases.
Companies stressed might even chop or eliminate dividend payments.
t.
Since 1971 the S&P 500 has delivered a CAGR of 7.65%. By taking out 4% per year by 2042 the port will be worth $9,645,25. Put half in bonds and you are shooting yourself in the foot. Just put the $5 million in an S&P 500 index fund.
There is a bit more to it. The SWR is 4% of the initial portfolio value, adjusted each year for inflation. That way you can maintain the same lifestyle through retirement. As it turns out, there were two critical start periods that lead to portfolio failure: 1929 (obvious what happened there) and 1966-68 when low stock and bond returns combined with future high inflation that would have killed a portfolio. In most other scenarios, you wind up filthy rich at the end of 30 years.
You can test all sorts of portfolios (stock and bond combinations) here:
This one is easier to use, but not as powerful:
But no matter the inputs, the SWR doesn’t vary much from 4%. And of course, as Ralph says the 4% SWR is necessarily backward looking. No one knows what the future holds. So while the 4% SWR isn’t “real” it is also invaluable as a starting place for planning purposes.
P.S. firecalc was created by a former TMF poster named dory36 who modeled it on work done by intercst.
cfiresim grew out of the Mr. Money Moustache forums, partially based on work by Nords, who was also a former TMF poster.
Captain:
Year Portfolio Withdraw Gain
4.00% 7.65%
2022 5,000,000 200,000 4,800,000 366,985
2023 5,166,985 206,679 4,960,305 379,241
2024 5,339,546 213,582 5,125,964 391,906
2025 5,517,871 220,715 5,297,156 404,995
2026 5,702,151 228,086 5,474,065 418,520
2027 5,892,585 235,703 5,656,882 432,498
2028 6,089,379 243,575 5,845,804 446,942
2029 6,292,746 251,710 6,041,036 461,868
2030 6,502,904 260,116 6,242,788 477,293
2031 6,720,082 268,803 6,451,278 493,233
2032 6,944,512 277,780 6,666,731 509,706
2033 7,176,437 287,057 6,889,380 526,729
2034 7,416,108 296,644 7,119,464 544,320
2035 7,663,784 306,551 7,357,232 562,498
2036 7,919,730 316,789 7,602,941 581,284
2037 8,184,225 327,369 7,856,856 600,697
2038 8,457,553 338,302 8,119,251 620,759
2039 8,740,010 349,600 8,390,409 641,490
2040 9,031,899 361,276 8,670,623 662,914
2041 9,333,537 373,341 8,960,196 685,053
2042 9,645,249 385,810
No, NO, NOOOO
you did not include inflation at used 4% inflation number?
At 7% inflation (that seen 1966-1982…)
your money would be worth half as much after 10 years (Rule of 72)
after 20 years, worth 1/4 of original amount.
Imagine gas and food bills then.
If you retired in 1966, 505 index, 50% bonds, you made it to 30 years with zero left in your portfolio
t.