$4 million! Really?

In my recent guest column (https://www.financialsamurai.com/life-goes-by-quick-money-thoughts-from-a-retiree-with-cancer/) I threw up, almost literally, a figure of $4 million as the amount needed to retire and then went on to apologize for doing so. Such a figure might seem about right for an expensive suburb of New York, perhaps even a bit on the light side of the equation. Emphasis on the word seem.

I got responses ranging from “You HAVE $4 million?!?” to “You ONLY have $4 million?!?”

Please note that I’m not telling what I have. But what I will say is that there are many ways to get to $4 million without having to have $4 million. Anyway, $4 million or any figure will mean something different to a family of four with the parents in their 40s than to a couple of empty nesters with the kids grown up, out of college, and capable of pouring a cup of coffee if need be.

A close friend lamented that he was nowhere near that figure and asked if he should worry. This got me started on trying to sort out details for different people, in different age groups, locations and circumstances. So here’s how I looked at such things.

While one may not have $4 mn in financial assets you can effectively add at least what an equivalent portfolio would generate in Social Security Income. If you’re going to get, say, $45,000 from Social Security at 70, well that’s like earning 4% on a $1.15 mn portfolio plus you get the annual cost-of-living gain so you’re somewhat secure from inflation. That COLA surely is worth at least $250,000 over the ensuing 20 plus years. Congratulations; you just found a $1.4 million addition to your portfolio.

Now add in a spouse’s Social Security, say $20,000 for argument’s sake, the equivalent of 4% on a $500,000 portfolio plus $100,000 for the inflation kicker. That adds another $600,000 to the mix for a whopping $2 million.

On top of that, you can reverse engineer health-care savings from private insurance to Medicare. In the state of Connecticut, a halfway decent plan with out-of-pocket maximums approaching $8,000 will cost $2,000 per month for a couple with standard medical needs (a few prescription drugs, no imminent surgeries, five or so doctor visits). That’s $32,000 a year and doesn’t include dental or vision. The point is, once you hit Medicare age you’ll probably save, oh, half that amount which roughly equates to a $400,000 portfolio generating 4%.

Are you downsizing your home in a high-tax area? Add in $6,000 in tax savings, a few grand in home insurance and upkeep and utilities and you have another $350,000, roughly, in a hypothetical portfolio without touching on taking out some equity.

The logic above just gave a couple in their 60s from a suburb of New York, Boston, LA, Washington or San Francisco the equivalent of a portfolio around $2,750,000 by the time they reach 70! Live it up I say!

To my friend I was able to point out that as an public school teacher, he’s got a rather substantial pension to consider as well, along with outrageous health benefits (in a good sense). Clink, clink, I calculated that to be equal to a $2 million portfolio! There are many ways to skin the $4 million cat.

To the people who wrote comments I was emphatic in saying a budget is vital to know what you really need. Clearly, a family in their early 40s with two young children a decade or more from college need to base their assets on a different perspective. Even then, there are choices to be made.

Choices are the crux of the matter because when it comes to money ‘choice’ likely means denying current consumption (and the utility that brings for the moment) to ensure a more comfortable longevity. A Honda CRX is a lot like a BMW X3 in what it can carry, but about $20,000 less and less in terms of insurance and gas consumption.

If you invested that $20,000 savings and got 5% per year on it and kept the car for 10 years you’d have $32,800. That doesn’t include the gas and insurance angle, so toss in $5,000. Not bad, but maybe not as much fun. It’s your choice.

A budget is a tedious thing to create, to adhere to, and can easily create an adversarial relationship with reality. Most people I suspect would like to spend more than they can afford to spend assuming they have long-term goals in mind, i.e. financial peace of mind.

There are a few exceptions, which probably get more attention in the media than their proportion demographically speaking warrants. I refer to the really rich, especially the young really rich, who made it on their stock options in high-tech firms, or celebrity status, or sports contracts. They can, on the surface, make the rest of us feel poor and left out. They are, however, in a distinct minority. Just 2.8% of households have $4 million or more, or about 3.5 million households. And per all I wrote above, I can get you to the equivalent of that with a little creativity and age.

But even then, when you read about high-profile bankruptcies, it wouldn’t hurt them to have a budget albeit they can pay someone to do it for them.
Drop into a younger demographic and the calculation becomes vastly more complicated, problematic and speaks to a group whose future is less predictable than someone in the 55+ cohort. The younger group has a lot more bills to pay for starters if children are involved. I can’t imagine that the Social Security promised to the 55+ crowd will be there for younger groups, or Medicare; to pay for what we face in the next 20-30 years will require higher taxes, lower benefits, higher age when benefits start, or a combination of all of that. The legacy of Federal deficits will come to haunt soon enough.

Further, if you retire early likely your contribution to Social Security will be less as you live off passive income and/or less active income. So downward go those benefits.

I can see the allure of early retirement, Lord knows, but you do have to pay for it somehow and adjust your lifestyle accordingly. I bet most people older than 60 with a $4 million portfolio created by my hook or crook methods would trade half that or more in exchange for 20 year or so of youth. Heck, I saw an ad for a shift manager job at Peet’s Coffee in Sudbury Mass that had medical benefits, a 401k, tuition support and all the coffee you could want. Here’s $2 million; I’ll take those 20 years back. I’d Clean fish at Whole Foods, too, if it came that. And I could detract the coffee or fish from that budget I created for some savings.

Which brings me back to $4 million. You can get there creatively in terms of getting the income equivalent to a $4 million portfolio. But if you’re 40? I’d be more comfortable with $4 million in liquid assets – you’ve got a lot of time ahead.

I’ll close with a conversation I had with that school-teacher friend of mine with the generous pension and health benefits when he does decide to retire. We were talking about going to a college reunion. He had just started teaching, loved it, but said he didn’t want to go and meet up with all those doctors, lawyers, bond traders and such and relay that he’s a teacher in an NYC public school. An ego thing, right?

I said to him with complete honesty that when he told people he was a teacher, a teacher of American History no less, a subject he loves, everyone would be thinking, “Wow, so you get your summers off?!?”

A decade or two and a couple of recessions later the thought would be more like, “Lucky stiff has tenure and I just lost my job.”