They figure that they could live comfortably for the balance of their lives if

They figure that they could live comfortably for the

This preview shows page 41 - 44 out of 263 pages.

They figure that they could live comfortably for the balance of their lives if they can spend $50,000 a year after taxes in 2009 dollars. That doesn’t seem like so much. Between the two of them they’re making double that now. Of course they don’t actually bring home $100,000. They pay out about $30,000 in taxes, between Social Security tax, federal income tax, and state income tax. So they are really living on $6,000 a month after taxes today. These people have $50,000 to invest. They intend to add $10,000 a year to it for the next twenty years. Yes, Lee, they procrastinated. They are guessing about the Number. They are now plodding dutifully toward it while reading The Secret .
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If they keep their money in mutual funds and the markets manage to do 8 percent average for the next twenty years, they might accumulate $690,000 by the time they retire. At age sixty-five, they will begin drawing down that amount while keeping it invested at 5 percent a year in bonds. They will spend $50,000 a year in 2009 dollars. Because of inflation they will run out of money in five years. This is terrible news. So terrible that right now you’re thinking it can’t be true. That I’ve somehow played with the inflation rate to make it massively expensive to live in 2029. I haven’t. I’ve assumed an average inflation rate of 4 percent per year. It’s actually expected to be quite a lot higher than that by a number of professionals, so the situation could be much worse than this, but it’s unlikely to be any better. The alternative scenario is deflation … and the depression that goes with it, in which case their dreams of putting away $10,000 a year will go up in smoke. They’ll be lucky to have enough left over after payday (if they have jobs) to cover the cost of living. Think 1934. Believe me, the inflationary scenario is prettier, even if it is rather grim. So in 2029, the equivalent of $109,000 a year will buy what $50,000
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buys today. Our hypothetical couple have $690,000. Invested in a 5 percent bond, this amount is going to earn about $25,000 after tax their first year in retirement. They’ll have to supplement the bond income by withdrawing $84,000 from their 401(k). But wait. There’s more. The money they pull out of their 401(k) is also fully taxed. In order to have $84,000 after tax , assuming a 25 percent tax rate overall, they’ll have to pull out a total of $112,000. Their $690,000 goes down by $112,000. That leaves $578,000. They will do that again the next year and they will then be down to less than $460,000. By the time they turn seventy they will have burned through the $690,000 and be broke. Five years. If they win a nice lottery or have a rich old uncle and somehow get a million dollars in 2029, they’ll last seven years. Okay, so here’s my best guess for the Number if you want to retire in 2029 on $50,000 a year in 2009 dollars, plan to live to be ninety-five, and don’t want to rely on anyone else: $3,600,000 . That’s a lot. But it’s going to take that to get you to the end without going broke.
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  • Spring '20
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