OK I have this friend who constantly worries about his retirement. So I took a look at his finances. He is married and 60 yr old. Can retire now but would more likely to retire in 2 years. His house is paid for (worth about $700,000). He has a pension which will pay him about $3,500 a month, and provide health insurance for life. He and his wife both have social security, but I am not sure how much of that is taxable. In addition, and here is the kicker, he has combined taxable and tax deferred investments totally a little over 2 million.
So can this guy rest easy and enjoy life? Or should he stay up at night worrying?
If we follow the rule of 25X, 4% withdrawal, he can tap $80K from the $2M each year. $42K of pension, totaling $112K/yr of income. You offer no idea what his pre-retirement income was. If I assume his wife was a doctor making $300K in her own practice, and he was a truck driver with a good pension, then they have a lot to worry about. SS will add some amount, we don't know how much, but the missing piece to this puzzle isn't even that, it's what was their final income, and were they living below or above their means. (If nothing else, this board has shown that replacement income doesn't work well by formula, i.e. at any income level some may need 100-110% replacement, others as low as 30-50%, all depending on income, spending, and lifestyle). JOE
Of course he can. That's more than the vast majority of Americans retire on, and almost all of his costs will be for discretionary spending.
Keeping in mind that "discretionary spending" is unlimited so regardless of how much money you have, it's always possible to blow through it. Let's pick on famous entertainers for examples. Remember MC Hammer, Can't Touch This?...he blew through his multimillion dollar fortune and ended up something like $10M in the red. Big mansion, big entourage and all those big pants I guess. Or Kim Basinger...buying her home town and going bankrupt in the process.
Does he want to do that kind of silly stuff? Though an "entourage" would be kind of a fun thing to have.
The guy is in great shape. The only fly in the soup is how strong the company funding is for their pension obligations. Try to ascertain any unfunded liabilities that the company might have to determine how stable that income will be. In the future he might buck up against a mean test for SS but with 2M I certainly wouldn't worry
Here's the rule of thumb I've been using: If you invest money sensibly, you can afford to take out 4% of the principal each year and be reasonably confident that over the long term, the principal (and therefore the amount withdrawn) will keep up with inflation. If you have a fixed payment, such as a pension, you can afford to spend half of it if you invest the rest; doing so will increase your balance enough to let your spending grow with inflation for the fixed payment too.
Your friend's pension is $3,500/month, or $42,000/year. Half of that is $21,000/year. 4% of $2 million is $80,000.
So my rule of thumb is that if your friend spends no more than $100,000 per year, and is sensible about investing the $2 million, he can expect that he will be able to spend an amount of money that approximately grows with inflation over the long term. The question for your friend, then, is
Can you live on $100K/year indefinitely, with the amount increasing approximately with inflation?
If the answer is "Sure, no problem!", then your friend has it made.
Now of course it is possible that the markets will tank. So your friend has to accept that possibility and decide, preferably in advance, what to do about it. A well-diversified portfolio of 60% stocks and 40% bonds lost about 15% from its peak during the 2000-2002 bear market, which would have meant that your friend would have to have restricted his spending to $89,000 (85% of $80,000 plus half of $42,000). That's not what you call a major problem.
Lots of other things could go wrong, too. Your friend could put all his money in the next Lucent and lose 95% of it. We could have another Great Depression. Terrorists could detonate a nuclear weapon in a major American city. For that matter, your friend could be hit by a truck. But I gotta say, if your friend stays up at night worrying, then either he's spending money like there was no tomorrow (in which case, why worry?) or he's a habitual worrier who will keep worrying no matter what happens.
Here's a pointer to one investment strategy that I think is reasonable:
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am not a customer of this guy, but I am following his advice. More or less.
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