I listen to a lot of podcasts on financial independence, investing and early retirement. Today I listened to one and I was shocked at the podcaster’s response to a question. I do not know this podcaster personally but I have listened to many of her podcasts and I think she is bright, knowledgeable and very entertaining. Also, I know myself well enough to know that just because I disagree with someone doesn’t mean they are wrong, so let me paraphrase this person’s question and the podcaster’s answer and you tell me if you think she missed it or if I’m just out of my mind. Because I am not going to throw mud at someone I enjoy listening to I’m going to call my unnamed and androgynous podcaster Heather and I’ll call the person who asked her a question Seth.
Seth from San Francisco called in to her show and gave Heather these facts. He and his wife have no kids and a $400,000 combined income. They have a paid for house or condo worth $300,000 and no debt of any kind. They have $2.6 Million dollars in investments and savings and will grow that by another $400,000 by the time they reach their planned retirement age of 52 in four years. About half of the money is in tax deferred accounts and the other half is in Roth and taxable accounts. They will be able to access over a million dollars of the money with no age restrictions and the rest will be available when they reach 59.5 years of age. In four years they plan to retire early and will sell their place and move to a low cost of living area and use the sale proceeds to purchase another home. They can live comfortably on $50,000 per year plus whatever health insurance costs. Seth’s question to Heather was, “Is $3 million enough to retire on at age 52?”
Now as a listener to this podcast at that point I did what you do, I immediately tried to guess the expert’s answer before she revealed it. And again, like you, I mentally reviewed the dozens of podcasts and blog posts I have read where people gave their “number”, the magic amount they had determined would fund the rest of their lives without working, at the standard of living they wanted. These are usually based on multiplying the annual living cost of the family by 25. This in turn is based on studies that show you can withdraw an inflation adjusted 4% of your investments every year and generally you won’t run out of money either for 30 years or probably forever.
About equal numbers of people seem to think you can safely pull as much as 5% or maybe only 3% depending on your own risk tolerance and how well the markets do over the next few decades. I think the lowest magic number I’ve seen was around $350,000 and I’ve seen a lot of people who felt $400-$450 thousand was more than adequate. I’ve seen a few people propose that the number could be as high as one million or perhaps as high as $1.5 million. And one of the great ones, the Financial Samurai, points out that if you intend to live in San Francisco you are going to need a lot more than you think! But remember, Seth expressly said he and his spouse are moving to a low cost area somewhere in the US. In fact they were making exploratory trips right now to locate the ideal retirement spot. And to top it all off they are kid free and plan to stay that way.
I expected Heather to say, “You’ve got this! You don’t even have to wait to age 52 you are good to pull the trigger on retirement today!” That would be in keeping with almost every bit of advice I’ve seen floated in this community of bloggers and podcasters. Instead she said it was “pretty risky to call it quits at age 52 with three million”. Yikes!!! Further she suggested they either consider continuing to work until age 55 or plan to work part time in retirement. Double Yikes!!!
What do you think? Did Heather step in it this time? I’m not really sure because usually when I question an expert it becomes very apparent why they are the expert and I am the grasshopper. But when I look at the facts as presented I cannot find a shred of risk in Seth’s plan. Remember, he is not going to stay in high cost San Fran, he is headed for somewhere where costs are low. If he can indeed live on $50,000 per year comfortably (plus health insurance) then using the conventional rules of thumb let’s run the numbers. First take health insurance, my wife and I are older than Seth so our insurance is more expensive than theirs will be. Using our costs of $16,000 per year added to their base cost of living of $50,000 results in a total cost of living of $66,000 per year. Applying the 4% rule Seth needs only $1.65 Million in investments to fund retirement but he will have $3 Million! Instead of a 4% withdrawal rate Seth’s actual withdrawal rate will be only 2.2%. Or to look at it another way Seth could afford to spend $120,000 per year safely from his investments and he is only going to need to spend about half of that.
Very few people, as in absolutely nobody, as far as I know, until now, have suggested that a safe withdrawal rate of 2.2% is “risky”. Barring the Zombie Apocalypse or the Illuminati Uprising Seth should be solid gold with his numbers. Think about it, if the Seth’s, with no kids, three million dollars, no debt, paid for house, willing to move to a low cost area, and perfectly happy at $50k plus insurance annual cost, can’t retire at 52 then how can any of the thousands of thirty somethings and forty somethings out there be doing it right now with only a fraction of three million dollars? So am I missing something or did Heather (not her real name!) just jump the shark?
Somebody help me here, explain why this retirement plan is too risky to execute, because I’m just not seeing the problem.
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