$4 Million and can’t retire?
Posted on October 10, 2007 - Filed Under Philosophy |
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“Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.” - Marcus Aurelius |
This is a great article.
Here’s the brief synopsis:
Middle class millionaires, ie those who have $2 million plus for retirement, can’t retire and live the life they are use to without significantly down-sizing.
This line from the article made me laugh out-loud: "Mansions and yachts are out. The mMillionaires[sic] who want to retire
before age 65 or 72, find they must live in three- and four-bedroom
homes and drive mid-priced four-door sedans and mini-vans."
Must live in a four bedroom home? Oh the horror! Drive a mid-priced four-day sedan? What is that? A BMW? Oh the agony these people must be suffering!
Before Sally Struthers starts the "Save the Rich" campaign, let’s run some numbers. $4 million in a tax-free municipal bond paying out . . .
5%? That’s $200,00 per year, tax free. And these people can’t live on
$200,000 per year?
"Sorry honey, no more diamond encrusted, gold computers. No, you can’t wash your hair in caviar anymore."
What middle-class millionaires is this article referring too?
I’m glad you asked.
The author answers this question: "They are your neighbors–millionaires who live middle-class lifestyles even though they may have millions in liquid assets."
Welcome to Stowage class. Now row with the rest of us slaves.
Maybe this is a foreign concept for me. I never envisioned living in an 8 bedroom house. Nor was owning a Lamborghini for me. Having my own private yacht take me and 12 loafers friends around the Mediterranean?
My objective has always been about flexibility; being able to live the life I want to live and do what I want to do. On $200,000/year tax free, I could do that in spades.
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6 Responses to “$4 Million and can’t retire?”
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ha - I actually was just crafting something up about this article also - ran across your blog on pfblog.com - isn’t it ridiculous???? How many people would give their right arm to be “mMillionaires”?
2 cliches:
“I guess it is just a matter of perspective” and “it takes all kind”.
Good grief.
Nice post -
There are tax-free, risk-free bonds paying out 5%? Why do people bother with high-yield bank accounts?
I suppose it’s still a very good amount of money even in those high-yield bank accounts.
Have a heart guys. Do you really think it’s fair to ask retiring baby boomers to live within their (considerable) means after all these years. America has gone through roughly two generations with no serious economic problems. The freewheeling spending has become a way of life to these people. To say that this must end and that the me generation suddenly has to live on a budget is really unconscionable. Where’s your compassion?
Municipal bonds don’t pay 5% and you need to reinvest 3% each year in order to compensate for inflation. There would be pretty much nothing left over from most munis after that. So you can’t have a risk free lifestyle unless you have so many millions that the account falling in value is not a problem. You need to invest in stocks, real estate etc. and then withdraw 4% a year. That’s $160k on $4million which sounds like a lot. On $2million just $80k which after paying the property tax in some areas of the US…
Hank, good grief is right. But in the grand scheme, I’m hoping to never have to worry about having a “nest egg” for retirement. Passive Income for me.
Lazy Man, I’m not an accountant but the municipal bonds are tax free whereas the high-yield account are not. But my knowledge on bonds are limited so maybe you can’t have access to the money like a regular checking account.
Engineer, I was being nice. That’s about as nice as I could get.
Moom, I know the 5% bonds are something I’ve discussed with my mentor multiple times. Before writing this article, I googled TFMB and found a website: http://www.stoeverglass.com/offeringsmuni.asp
There are a few that are 5% and above per this chart.
These are the nest eggs owned by relatively highly paid professionals and upper-middle managers. These folks are used to $250,000 to $400,000 household incomes plus the perks of corporate employment, professional partnerships or small business ownership. They have exercised their stock options, maxed out the 401k or SEP, and bought a very nice house in keeping with their peers.
The models used by most financial advisors posit a starting withdrawal rate of 3 to 4 percent of assets, grown at 3 percent inflation. That’s the acceptable risk level produced by the Monte Carlo modeling that these advisors use. Four percent of $4,000,000 yields $160,000. Not enough to maintain lifestyle.
These same financial advisors advised carrying a large mortgage to maximize the tax benefit and to free up cash for investing. At retirement, their clients will have large mortgage payments that they will be making throughout most if not all of their retirement years. The mortgage payments undermine the lifestyle.
To maintain lifestyle, these folks need $10,000,000 of assets yielding 6 percent over the whole portfolio. Half must be reinvested, and half can be used to live on. Try accumulating that level of assets even with a high household income.
The benefit of a defined benefit pension plan is that new workers continue to pay into it. Their money is invested along with the retirees’ money and fewer assets are needed to support a given pension level. When your pension plan is your 401k and your taxable portfolio, no new money comes in after you retire and the assets you have at retirement must do all the work.
Oddly, a lower paid person whose Social Security makes up a larger portion of his or her retiremrnt income has an easier time replacing his or her income. Add a corporate or government pension in, and the shortfall is much easier to make up.