In retirement, a $100 monthly expense needs $30,000 in your portfolio

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
User avatar
HomerJ
Posts: 13214
Joined: Fri Jun 06, 2008 12:50 pm

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by HomerJ » Tue Sep 10, 2019 12:00 pm

Ron wrote:
Tue Sep 10, 2019 8:58 am
Be it a cellphone, a mortgage note, or any other expense in retirement, remember that you not only have to pay the monthly charge/bill, but you also have to account for the taxes due on the withdrawal from your account or income in computing your actual expense.
Another good reason to pay off the mortgage before retirement. Keeps your "income" lower, since you'll need to pull less from your retirement accounts, and your taxes lower.
The J stands for Jay

EnjoyIt
Posts: 2511
Joined: Sun Dec 29, 2013 8:06 pm

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by EnjoyIt » Tue Sep 10, 2019 12:04 pm

HomerJ wrote:
Tue Sep 10, 2019 11:55 am
RickBoglehead wrote:
Tue Sep 10, 2019 7:13 am
What I don't get is the perspective that paying off the mortgage before retirement results in less assets being needed.

If I owe $400,000 on my mortgage now, I can pay it off before I retire, and not have $400,000 in assets invested in the market, i.e. I'd be selling a mutual fund, or not investing cashflow, in order to pay off that mortgage. Right now my mortgage is 2.875%, so I want to keep that $400,000 invested in the market, because I'm earning more.
(1) You're not guaranteed to earn more in the stock market
(2) If you have any money in bonds, you're not earning more, so why not pay off the mortgage with bond money?

(3) The 2.875% is interest only. Principal makes the payment even higher. Because of the 3%-4% withdrawal limits we've set on ourselves, paying off the mortgage before retirement makes a ton of sense.

If one's mortgage is $400,000, your payment is $20,000 a year.

But at 4% withdrawals, you need $500,000 to generate $20,000 a year. At 3% withdrawals, you need $600,000

So paying it off makes total sense.
In retirement when you add a payment expense like a mortgage it can add increased taxes, loss of subsidies, decreased ability for Roth conversions before 70, selling equities at 0% long term capital gains tax, and I'm sure a few other undesirable consequences. No decision should be done in a vacuum.

EnjoyIt
Posts: 2511
Joined: Sun Dec 29, 2013 8:06 pm

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by EnjoyIt » Tue Sep 10, 2019 12:20 pm

CyclingDuo wrote:
Tue Sep 10, 2019 11:41 am
willthrill81 wrote:
Mon Sep 09, 2019 11:28 pm
I know that this is something very simple, but it still kind of amazes me. Perhaps it will help someone, especially someone who isn't a Boglehead and potentially already aware of such things, to see how much of an impact expenses in retirement make on their needed portfolio size.

Assuming 4% portfolio withdrawals in retirement, this means that you need 25x your annual expenses in retirement (at least those that will be funded by portfolio withdrawals). It also means that you need 300x your monthly expenses.

(For early retirees or those that just feel more comfortable with a 3% withdrawal rate, that works out 400x your monthly expense.)

This means that you need $30,000 in your portfolio to cover a $100 monthly expense in retirement.

That's about what our cell phone service bill is. $30,000, more than 18 months of maxing out a 401k, just in order to pay for our cell phone service in retirement. :shock:

For me at least, this really puts into perspective how much expenses drive how much we need to retire.
Excellent perspective.

:sharebeer

I always think about how much portfolio one needs to produce $10,000 bucks a year ($833 per month) in retirement. If using the 4% SWR, then we could assume each $250K has the potential to produce supplemental income to couple with other sources of income in retirement such as a pension, Social Security, annuities, part-time work, etc... during retirement.

Or, the easier round figure number of producing $1000 bucks a month requires a $300K portfolio at the 4% SWR.

That will keep us motivated in the final working years/transition years into our retirement for each $1000 we will need...
This year we were pretty much at 25x + mortgage value. This year we decided to increase our expenses by 20% to make life easier/more fun. At 4% real returns it will take us 5 years to get to our new 25x. At 5% real returns it will take us 4 years. If we contribute an additional 40% of our yearly living expenses to savings and earn 5% a year it will take us 2.75 years to get back to our new 25x.

That's the thing, once you are 25x, it does not take much more effort to increase potential spending in retirement. That is how you keep getting all those one more year folks. Honestly, if we hated our jobs we would have been long retired by cutting back on expenses and eliminated work completely.

User avatar
HomerJ
Posts: 13214
Joined: Fri Jun 06, 2008 12:50 pm

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by HomerJ » Tue Sep 10, 2019 12:21 pm

EnjoyIt wrote:
Tue Sep 10, 2019 12:04 pm
In retirement when you add a payment expense like a mortgage it can add increased taxes, loss of subsidies, decreased ability for Roth conversions before 70, selling equities at 0% long term capital gains tax, and I'm sure a few other undesirable consequences. No decision should be done in a vacuum.
Yes, exactly...

Without a mortgage payment, we will probably qualify for ACA subsidies. With a mortgage, I'd have to pull more from retirement accounts, and my apparent "income" will be higher, and we would lose the subsidies.
The J stands for Jay

User avatar
Harry Livermore
Posts: 67
Joined: Thu Apr 04, 2019 5:32 am

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by Harry Livermore » Tue Sep 10, 2019 12:29 pm

Such a great way to think about it. I "get it" intuitively, but usually approach it from the other direction (I have a "best-guess" budget for Retirement Year One) and look at what my portfolio spins off at 3%. I'm also budget-focused so I'm always looking for things to cut, but I know a lot of folks just don't try hard enough on the budgeting end.
This is a great way to frame it for younger folks, and for those who don't necessarily focus enough on expenses.
Thanks Will.
Cheers

LiterallyIronic
Posts: 1284
Joined: Sat Dec 05, 2015 10:36 am

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by LiterallyIronic » Tue Sep 10, 2019 12:45 pm

corn18 wrote:
Tue Sep 10, 2019 10:33 am
This chart can be made for any level of income. This one is for $600k income. And it isn't exact. Just a way to help convince my wife that if we can somehow manage to live on $100k / year, I could retire now. She likes $150k a lot better. And $200k even more. I might be dead by then.
How did you make the calculations? To determine how long I need to work to pay a one-time $1,000 item, for example, would vary. If I stopped my 401k contributions, it would take fewer days to have that $1,000 in my pocket than it would normally take. For the monthly increase, did you just multiple that by 12 to get the annual expense and then multiply by 25 to know how much more you would need to have 25x that in retirement and then divide that by your daily amount saved for retirement to determine how much longer you would need to work?

Walkure
Posts: 110
Joined: Tue Apr 11, 2017 9:59 pm

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by Walkure » Tue Sep 10, 2019 1:07 pm

LiterallyIronic wrote:
Tue Sep 10, 2019 12:45 pm
corn18 wrote:
Tue Sep 10, 2019 10:33 am
This chart can be made for any level of income. This one is for $600k income. And it isn't exact. Just a way to help convince my wife that if we can somehow manage to live on $100k / year, I could retire now. She likes $150k a lot better. And $200k even more. I might be dead by then.
How did you make the calculations? To determine how long I need to work to pay a one-time $1,000 item, for example, would vary. If I stopped my 401k contributions, it would take fewer days to have that $1,000 in my pocket than it would normally take. For the monthly increase, did you just multiple that by 12 to get the annual expense and then multiply by 25 to know how much more you would need to have 25x that in retirement and then divide that by your daily amount saved for retirement to determine how much longer you would need to work?
I'm puzzling over this formula, but on the recurring expense side. Let's say your projected annual expenses are 50k, so 25x gives you a "number" of $1,250,000, which you will reach in year 'n.' Now you decide to add a recurring expense of $500 a month, so 56k x 25 = $1,400,000 as your new target. You need to retire with an extra $150k. But that doesn't mean you need to save an extra $150k. You have two basic choices, save more every month starting now, or continue to save the same amount each month and work a little longer. Let's assume you are already maxed out on savings rate and so you will work longer. If it now takes you to year n+1 to reach your number, the $1,250,000 you already had saved gets an extra year to grow - a modest 4% real gain adds $50k, so you only need to save $100k more to fund the $6k in annual expense.

EddyB
Posts: 899
Joined: Fri May 24, 2013 3:43 pm

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by EddyB » Tue Sep 10, 2019 1:11 pm

willthrill81 wrote:
Tue Sep 10, 2019 10:22 am
RickBoglehead wrote:
Tue Sep 10, 2019 7:13 am
roadnottaken wrote:
Tue Sep 10, 2019 7:03 am
This is why I've concluded that I have to pay-off the mortgage ASAP - before retiring is plausible...
I'm always puzzled when someone mentions this. I get the psychological piece - not having a mortgage payment could possibly relieve some stress in retirement when one doesn't have income from a job.

What I don't get is the perspective that paying off the mortgage before retirement results in less assets being needed.
The problem with any kind of debt, including a mortgage, in retirement is that it increases your sequence of returns. This is because you must continue servicing the debt even if your portfolio suffers. Debt is leverage, and leverage works both ways.
Plus it may come at an accelerating tax rate, as one draws more income to offset the expense.

User avatar
corn18
Posts: 1478
Joined: Fri May 22, 2015 6:24 am

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by corn18 » Tue Sep 10, 2019 2:11 pm

LiterallyIronic wrote:
Tue Sep 10, 2019 12:45 pm
corn18 wrote:
Tue Sep 10, 2019 10:33 am
This chart can be made for any level of income. This one is for $600k income. And it isn't exact. Just a way to help convince my wife that if we can somehow manage to live on $100k / year, I could retire now. She likes $150k a lot better. And $200k even more. I might be dead by then.
How did you make the calculations? To determine how long I need to work to pay a one-time $1,000 item, for example, would vary. If I stopped my 401k contributions, it would take fewer days to have that $1,000 in my pocket than it would normally take. For the monthly increase, did you just multiple that by 12 to get the annual expense and then multiply by 25 to know how much more you would need to have 25x that in retirement and then divide that by your daily amount saved for retirement to determine how much longer you would need to work?
I don't remember how I did it.
Don't do something, just stand there!

User avatar
MN-Investor
Posts: 347
Joined: Mon May 02, 2011 9:04 am
Location: Twin Cities

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by MN-Investor » Tue Sep 10, 2019 2:23 pm

I may be looking at it too simply, but the one potential expense which appalls / amazes me is the fee asset management companies charge. A typical fee is 1% of invested assets. Well, if you're supposed to be living on 4% of your assets each year in retirements, you will be paying 25% of your asset withdrawal to the asset management company.
The key to success - Save early, save often, invest well.

MichCPA
Posts: 721
Joined: Fri Jul 06, 2018 9:06 pm

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by MichCPA » Tue Sep 10, 2019 2:32 pm

MotoTrojan wrote:
Tue Sep 10, 2019 6:17 am
An espresso a day from most coffee shops is getting close to needing $50K, yikes!
Not sure why anyone is surprised that small numbers get much bigger when you turn them into a perpetual annuity.

Buy a reasonable house, drive a reasonable car, control eating out and buy whatever coffee your heart desires. Those will cost you waaaay more.

CoastalWinds
Posts: 434
Joined: Sat Apr 06, 2019 8:28 pm

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by CoastalWinds » Tue Sep 10, 2019 2:59 pm

Texanbybirth wrote:
Tue Sep 10, 2019 8:14 am
One thing that struck me: this helps me appreciate the value of Social Security retirement benefits. If my benefit will be $2,500 at FRA, then I could say it’s equivalent to $750k in my portfolio. Not bad!
And let’s not forget, these aren’t entitlements. You earned this benefit by paying into the system for years!

User avatar
Topic Author
willthrill81
Posts: 12761
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by willthrill81 » Tue Sep 10, 2019 5:16 pm

MN-Investor wrote:
Tue Sep 10, 2019 2:23 pm
I may be looking at it too simply, but the one potential expense which appalls / amazes me is the fee asset management companies charge. A typical fee is 1% of invested assets. Well, if you're supposed to be living on 4% of your assets each year in retirements, you will be paying 25% of your asset withdrawal to the asset management company.
You're absolutely right. Paying a 1% AUM fee means that you need a 25% larger portfolio in order to have the same after-fee withdrawal. So instead of needing $1 million, you need $1.25 million, for instance.

I know a financial adviser that until recently charged a 1.4% AUM fee. :shock:
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

prd1982
Posts: 128
Joined: Sun Jan 08, 2017 4:43 pm

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by prd1982 » Tue Sep 10, 2019 5:34 pm

Saying you need $30,000 for a $100/month expense (4% rule) is over-stating how much you need for many expenses. The 4% rule is designed to minimize running out of money. In most cases, you will die still having a lot of money. So sure, you want 25x saved for expenses such as utilities, food, medical. But a lot of expenses are not mandatory (e.g., vacations, dining out, expensive foods, take-out coffee, charitable giving). Not sure what % you need to have a 70% chance of having enough for these optional expenses, but that seems like a reasonable target. This forum often seems intent on telling people they are not saving enough, or are spending too much.

User avatar
Topic Author
willthrill81
Posts: 12761
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by willthrill81 » Tue Sep 10, 2019 5:39 pm

prd1982 wrote:
Tue Sep 10, 2019 5:34 pm
Saying you need $30,000 for a $100/month expense (4% rule) is over-stating how much you need for many expenses. The 4% rule is designed to minimize running out of money. In most cases, you will die still having a lot of money. So sure, you want 25x saved for expenses such as utilities, food, medical. But a lot of expenses are not mandatory (e.g., vacations, dining out, expensive foods, take-out coffee, charitable giving). Not sure what % you need to have a 70% chance of having enough for these optional expenses, but that seems like a reasonable target. This forum often seems intent on telling people they are not saving enough, or are spending too much.
You make a good point. However, there are many here who firmly believe that many of their discretionary expenses, such as traveling and dining out, will one day be replaced with higher medical costs and long-term care expenses.

Personally, we plan on front-loading our withdrawals somewhat because we plan to spend more in our 50s and 60s than in our 70s and 80s, which is what the data suggest that most retirees' spending actually looks like.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
Eagle33
Posts: 199
Joined: Wed Aug 30, 2017 3:20 pm

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by Eagle33 » Tue Sep 10, 2019 9:04 pm

willthrill81 wrote:
Tue Sep 10, 2019 5:16 pm
MN-Investor wrote:
Tue Sep 10, 2019 2:23 pm
I may be looking at it too simply, but the one potential expense which appalls / amazes me is the fee asset management companies charge. A typical fee is 1% of invested assets. Well, if you're supposed to be living on 4% of your assets each year in retirements, you will be paying 25% of your asset withdrawal to the asset management company.
You're absolutely right. Paying a 1% AUM fee means that you need a 25% larger portfolio in order to have the same after-fee withdrawal. So instead of needing $1 million, you need $1.25 million, for instance.

I know a financial adviser that until recently charged a 1.4% AUM fee. :shock:
Actually one would need $1.33 million to get the desired $40k after AUM fee.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.

User avatar
Topic Author
willthrill81
Posts: 12761
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by willthrill81 » Tue Sep 10, 2019 9:13 pm

Eagle33 wrote:
Tue Sep 10, 2019 9:04 pm
willthrill81 wrote:
Tue Sep 10, 2019 5:16 pm
MN-Investor wrote:
Tue Sep 10, 2019 2:23 pm
I may be looking at it too simply, but the one potential expense which appalls / amazes me is the fee asset management companies charge. A typical fee is 1% of invested assets. Well, if you're supposed to be living on 4% of your assets each year in retirements, you will be paying 25% of your asset withdrawal to the asset management company.
You're absolutely right. Paying a 1% AUM fee means that you need a 25% larger portfolio in order to have the same after-fee withdrawal. So instead of needing $1 million, you need $1.25 million, for instance.

I know a financial adviser that until recently charged a 1.4% AUM fee. :shock:
Actually one would need $1.33 million to get the desired $40k after AUM fee.
Yes, you're right.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

inbox788
Posts: 6418
Joined: Thu Mar 15, 2012 5:24 pm

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by inbox788 » Tue Sep 10, 2019 9:38 pm

Walkure wrote:
Tue Sep 10, 2019 1:07 pm
I'm puzzling over this formula, but on the recurring expense side. Let's say your projected annual expenses are 50k, so 25x gives you a "number" of $1,250,000, which you will reach in year 'n.' Now you decide to add a recurring expense of $500 a month, so 56k x 25 = $1,400,000 as your new target. You need to retire with an extra $150k. But that doesn't mean you need to save an extra $150k. You have two basic choices, save more every month starting now, or continue to save the same amount each month and work a little longer. Let's assume you are already maxed out on savings rate and so you will work longer. If it now takes you to year n+1 to reach your number, the $1,250,000 you already had saved gets an extra year to grow - a modest 4% real gain adds $50k, so you only need to save $100k more to fund the $6k in annual expense.
(SP500 year end value 2016-2018: 2240 2675 2500)

Year n+1 can be fickle. If it was 2018, a negative year, you'd need to save not only the $150k, but some extra for the market loss the year of retirement. If you retired 2017, a year that was up nearly 20%, a 60/40 AA would have gained just about $150k on the $1,250,000. In one case, you'd be looking at cutting some expenses, while in the other, you could spend your extra $500 a month. It's like winning a new car...no make that 10 new car leases if you live long enough to enjoy it.

https://www.ssa.gov/planners/lifeexpectancy.html

User avatar
Topic Author
willthrill81
Posts: 12761
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: In retirement, a $100 monthly expense needs $30,000 in your portfolio

Post by willthrill81 » Tue Sep 10, 2019 9:46 pm

inbox788 wrote:
Tue Sep 10, 2019 9:38 pm
Walkure wrote:
Tue Sep 10, 2019 1:07 pm
I'm puzzling over this formula, but on the recurring expense side. Let's say your projected annual expenses are 50k, so 25x gives you a "number" of $1,250,000, which you will reach in year 'n.' Now you decide to add a recurring expense of $500 a month, so 56k x 25 = $1,400,000 as your new target. You need to retire with an extra $150k. But that doesn't mean you need to save an extra $150k. You have two basic choices, save more every month starting now, or continue to save the same amount each month and work a little longer. Let's assume you are already maxed out on savings rate and so you will work longer. If it now takes you to year n+1 to reach your number, the $1,250,000 you already had saved gets an extra year to grow - a modest 4% real gain adds $50k, so you only need to save $100k more to fund the $6k in annual expense.
(SP500 year end value 2016-2018: 2240 2675 2500)

Year n+1 can be fickle. If it was 2018, a negative year, you'd need to save not only the $150k, but some extra for the market loss the year of retirement. If you retired 2017, a year that was up nearly 20%, a 60/40 AA would have gained just about $150k on the $1,250,000. In one case, you'd be looking at cutting some expenses, while in the other, you could spend your extra $500 a month. It's like winning a new car...no make that 10 new car leases if you live long enough to enjoy it.

https://www.ssa.gov/planners/lifeexpectancy.html
Yes. And an investor with a 20% savings rate and a 60/40 (all U.S.) AA who was at 25x in the year 2000 and who was trying to reach 33.3X (i.e. 3% withdrawals) would not have done so until 2012.

Sequence of returns risk impacts both accumulators and retirees, most especially in the 10-15 years leading up to and immediately following retirement.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Post Reply