> ... That still works out to $1.5M. How many people even make $1.5M by the time they're 30, even before taxes? And that's to live more or less in poverty.
The above analysis misses something important -- compound interest.
Without compound interest, yes, if you need $1.5 million to retire, then you need $1.5 million in advance. But if you create and then invest your nest egg, the math changes completely.
Consider an average return on investment of 12% per annum. That means if you only need $12,000 per year to live in decent poverty, you only need a nest egg of $100,000. In this scenario, to account for inflation, you must withdraw less than $12K per year and let the nest egg grow faster than inflation can erode it.
But let's say that stock market won't deliver 12% per year -- it hasn't been doing that for a while. Let's say a more realistic return is 8% from various investments. Let's also say we want an income of $50K per year for life. So we need a nest egg of:
50 / 0.08 = $625K
That doesn't seem too bad, or unrealistic. It requires discipline and a lot of advance planning. But it's entirely practical.
Now back to your original example:
> ... That still works out to $1.5M. How many people even make $1.5M by the time they're 30, even before taxes? And that's to live more or less in poverty.
Let's say we have that nest egg -- $1.5M. Assuming an 8% return, what does that give us per year?
1.5M * 0.08 = $120K
And guess what? You aren't under any responsibility to die when your money runs out, because it isn't going to run out -- at the end of your life, you still have $1.5M in the bank to give to your children.
> The above analysis misses something important -- compound interest.
You are making the assumption that getting an 8% return is something that is easy and safe to do. What happens to the people who retire in a year like, say, 2007. Their first year of retirement, expecting to withdrawal $50k to live on and instead watch their $625k dwindle down to $460,000. The next year maybe they get lucky and only lose 2%, minus the $50k they withdrew. Now they're down to around $400k. Ok the market picks up and they get a 3% average the next year but took out another $50k. Now they've got $360k. After a mere 3 years of retirement they've used up half their savings. Even if they manage to get 8% a year for the next 30 years, they now only have $28,000 a year to live on. Whoops.
The assumption that your money won't run out is not a given. This is the reason it's important to have a LARGE nest egg. While $625k might do it if you could invest it at 8%, you can't count on that and the market could quickly leave you living with your children. To really be safe you're going to need significantly more money than you think you will. You also aren't accounting for inflation, which means as you age either you're going to have to cut your expenses ~3% a year or you're going to have to increase your withdrawls ~3% a year.
I don't know what the story is with these retired by 30 people, but I would be willing to bet a fair number of them will find themselves broke and returning to work at some point in their lives.
> You are making the assumption that getting an 8% return is something that is easy and safe to do.
But it is. It's as safe as anything you can name. Or would you prefer a bank savings account, insured against loss, that produces a return of less than 1%?
A bank savings account is safe by one definition, but since it's an example of sanctioned corporate theft, it's not safe at all.
> The assumption that your money won't run out is not a given.
That assumption depends on the wisdom of those who run the accounts. There are any number of ways to prevent eroding the principal, primarily by paying attention to investment growth and inflation.
> I don't know what the story is with these retired by 30 people, but I would be willing to bet a fair number of them will find themselves broke and returning to work at some point in their lives.
Well, I happen to be one who successfully retired young. I wrote a best-selling program (http://en.wikipedia.org/wiki/Apple_Writer) in 1980 (wen I was 35), made a bundle, and retired. I sailed solo around the world for four years, had a lot of adventures, and every year I travel to Alaska in my latest boat to photograph grizzly bears. And in constant dollars, I have approximately the same nest egg that I did when I started.
It's simple -- all you need to do is pay attention to your investments and to inflation.
> You also aren't accounting for inflation, which means as you age either you're going to have to cut your expenses ~3% a year or you're going to have to increase your withdrawls ~3% a year.
What? No, all you need to do is adjust your withdrawals to account for inflation. That's simple -- it's as simple as multiplying two or three numbers together as in my prior post.
> But it is. It's as safe as anything you can name.
Having $625,000 and hoping for an 8% return to sustain your retirement is not nearly as safe as, say, having $2 million dollars to sustain your retirement.
If you've only got so much money, sure, trying to live off the interest is not a terrible strategy. If we're talking retirement planning (which I thought we were), then planning to live off 8% interest of a minimal amount of savings is NOT a good strategy to shoot for. It is far better to be conservative, plan to have a larger amount of savings and invest in safer options (such as bonds) and plan to have enough money to sustain you for 30 years.
Now of course if it comes time to retire and you only have $500k to make last, you're obviously going to want to take some greater risks with your investments and live as minimally as possible and hope for the best.
This is why I made my initial point, that I can see elderly suicides rising in the future. What's going to happen when the market doesn't go your way and at 80 years old you're out of money and your kids have their own problems? At that point you don't have a lot to look forward to other than living on welfare and watching your health decline...
> If you've only got so much money, sure, trying to live off the interest is not a terrible strategy. If we're talking retirement planning (which I thought we were), then planning to live off 8% interest of a minimal amount of savings is NOT a good strategy to shoot for.
Of course it is. It's the most obvious and most reliable strategy to plan for, regardless of how much money you have. Do you suppose Warren Buffett has a cash slush fund stashed away in his mattress for his retirement?
> This is why I made my initial point, that I can see elderly suicides rising in the future.
That might happen. It might happen because people can't plan their lives very well.
> Now of course if it comes time to retire and you only have $500k to make last, you're obviously going to want to take some greater risks with your investments and live as minimally as possible and hope for the best.
How is that a problem, and how does it contradict the idea that one should plan a retirement based on investments?
I think your objection is not to prudent investments but to the unfairness of life. If so, go ahead -- complain about how unfair life is, but in the meantime, save some money for your retirement.
The above analysis misses something important -- compound interest.
Without compound interest, yes, if you need $1.5 million to retire, then you need $1.5 million in advance. But if you create and then invest your nest egg, the math changes completely.
Consider an average return on investment of 12% per annum. That means if you only need $12,000 per year to live in decent poverty, you only need a nest egg of $100,000. In this scenario, to account for inflation, you must withdraw less than $12K per year and let the nest egg grow faster than inflation can erode it.
But let's say that stock market won't deliver 12% per year -- it hasn't been doing that for a while. Let's say a more realistic return is 8% from various investments. Let's also say we want an income of $50K per year for life. So we need a nest egg of:
That doesn't seem too bad, or unrealistic. It requires discipline and a lot of advance planning. But it's entirely practical.Now back to your original example:
> ... That still works out to $1.5M. How many people even make $1.5M by the time they're 30, even before taxes? And that's to live more or less in poverty.
Let's say we have that nest egg -- $1.5M. Assuming an 8% return, what does that give us per year?
1.5M * 0.08 = $120K
And guess what? You aren't under any responsibility to die when your money runs out, because it isn't going to run out -- at the end of your life, you still have $1.5M in the bank to give to your children.