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I once shared this outlook, but when one considers their own ideas about the lifestyle "wealthy" entails, and run some numbers, specifically determine the annua

I once shared this outlook, but when one considers their own ideas about the lifestyle "wealthy" entails, and run some numbers, specifically determine the annual spend for that lifestyle, one will quickly realize the truth. A million can be blown in a year, or SWR'd (safe withdrawal rate) at $40k a year indefinitely. Can you retire on $40k a year? Would you want that level of income and lifestyle? Of course this depends on location and cost of living. I am referring to someone in the US. Edit: Specifically, does anyone (in the US) consider a $40k year income to qualify as "Wealthy"? Since that's what's being discussed here.

handrous 5y ago
> Can you retire on $40k a year? Maybe in Europe. No, in the US. Not even close. Even with a paid-off house. Certainly not before "retirement age". Health care is the reason.
- influx 5y ago
  Obamacare subsidies are based on income. You are likely getting subsidies at this level of income. Will it exist for the next 40 years, who knows?
  - handrous 5y ago
    A couple years of serious illness for you or anyone you're responsible for (spouse, children) will still ruin your retirement plans, if you try to retire early on $40,000/yr in income. A "Silver" exchange plan, even if the premium were $0/m, would still expose you to so much financial risk ("max out-of-pocket") that you'd be rolling some not-very-friendly dice, trying to retire early.
    - ac29 5y ago
      What is the max out of pocket number that you are seeing that is so financially ruinous? My out of pocket maximum is something like $7000/year. That would be painful on $40k/year, but we're talking about someone with a $1M nest egg, so unless you hit the maximum every single year, its not impossible to cover. Spending $47k/year for a couple years instead of $40k isnt going to financially ruin someone with $1M.
      - handrous 5y ago
        My assumption is that a couple (say) would be running with pretty thin margins, even assuming no mortgage interest or rent and modest living, on $40,000 a year and a fairly low CoL area, so losing another $7k (that's per person, right, not the max-out-of-pocket for the whole plan? Or maybe your exchange plans are way better than ours) would be be very painful, at best. A forever-alone hermit living in a rural trailer park might be another story—there are definitely some circumstances I can imagine in which it might be kinda OK to try to retire before Social Security and Medicare kick in on $1m savings, but not ones that involve anything like a normal life. And sure, you may not be missing payments thanks to the $1m in the bank, but if you start eating that principle too early (=before you're 60ish years old, at a minimum) you might find yourself needing to get a job after being out of the work force for (say) 10 years and while possibly dealing with serious, chronic health problems. I'm not sure how disability works when you haven't worked for a few years due to retiring, and have six-plus figures in the bank still, but my guess would be "it doesn't", until you are, in fact, ruined.
- ixacto 5y ago
  You can still get ACA subsidies if you fall within the income level it's not means tested, they absolutely designed it this way to be gamed. Also qualified distributions from a ROTH IRA are not considered part of modified adjusted gross income. So do your mega-backdoor ROTH conversion and take out of that and it doesn't count against the insurance-company subsidy.
  - handrous 5y ago
    The subsidies don't help with copays, deductibles, and co-insurance, right? Those can run into the five figures even on a "silver" plan, in a bad year. If someone on the plan gets cancer, congrats, now every year is a bad year.
    - lowercased 5y ago
      that's partially true, but... 'retiring' on $100k year is still potentially disastrous if you have a major health issue.
      - handrous 5y ago
        Sure, yeah. My point is mainly that expenses for early retirement in the US have the potential to vary a lot compared to... well, basically any other OECD state, really, mostly due to healthcare. This makes the lower bound for a reasonably-safe early retirement quite a bit higher, such that merely generating enough safe-withdrawal income to live on in a good year isn't enough, even if the markets do exactly as well as you're counting on and that income's steady.
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antisthenes 5y ago
> I once shared this outlook, but when one considers their own ideas about the lifestyle "wealthy" entails, and run some numbers, specifically determine the annual spend for that lifestyle, one will quickly realize the truth. In other words, at some point you underwent lifestyle inflation and didn't realize it. And now you're unwilling to give it up. > Of course this depends on location and cost of living. I am referring to someone in the US. Millions of people raise families on 40k/year in the United States. These are your fellow citizens. Perhaps you can ask them how they do it and whether they are "satisfied" with that level of income and lifestyle.
- Glyptodon 5y ago
  I think poster is saying $40k a year is fine in LCOL but not wealthy. And it's the yield of $1 mil.
  - antisthenes 5y ago
    $40k a year during retirement. That was the original argument. With mortgage paid off and grown kids and social security supplement, $40k is plenty of money.
    - tunesmith 5y ago
      Adding in social security is really moving the goalposts. The discussed scenario is about working for less than ten years, which means much younger than 65-72.
      - yupper32 5y ago
        They're also including a mortgage that's paid off lmao. Yeah totally, $40k is plenty. You just need to not have kids, have a paid off house, no loans, live in LCOL area, get grandma's inheritance, have it come from a retirement account with minimal taxes, hope inflation doesn't kill your $40k over time, hope healthcare costs don't continue to rise, etc....
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tunesmith 5y ago
Agreeing here, but to clarify, a million is probably more like $32,500/year indefinitely. The 4% rule is outdated and was designed for 30-year timeframes anyway.
nostrademons 5y ago
$40K is more than the median personal income in the U.S ($35K as of 2019). Plenty of people would consider $40K/year without having to work wealthy. Even in VHCOL areas, $40K/year is fine if you own your own home and your kids are out of childcare years. VHCOL areas are typically VHCOL because of housing prices and their effect on service-provider wagss. If you take them out of the equation and only need to pay for food, gas, entertainment, utilities, insurance, and depreciation on your car, $40K/year (= $3.3K/month) is plenty.
- gnicholas 5y ago
  > Even in VHCOL areas, $40K/year is fine if you own your own home and your kids are out of childcare years. Are you considering "childcare years" to include college? Also, in CA/IL/NJ you could easily spend $15k/yr in property taxes alone. That would leave $25k for everything else. Lastly, the average price of a new car sold in the US is $40k. You can buy used, sure, but these days even those are getting more expensive.
  - PaulDavisThe1st 5y ago
    So fine, US$40k/yr isn't comfortable living in some places. But it's very comfortable living (given the lack of any need to do paid work) in many others. Context is everything. If you really must live in an expensive part of the USA, then $1M in the bank is not going to cut it.
  - nostrademons 5y ago
    "Are you considering "childcare years" to include college?" Somewhat. Personally I think college will be obsolete by the time kids today reach college age. It was a bubble in the early 2000s when I graduated (a significant number of my classmates did not get jobs that make back the debt they took out for it), it's certainly a bubble now, and I think the bubble will have burst in 18 years and people will realize that it's stupid to go to college. But even if you don't believe quite so extreme predictions - the advantage of thinking in balance-sheet terms is that you set aside funds for these expenses and let them compound until you need it. I just ran a NPV calculation on 4 years of college @ $37K/year starting in 18 years with a 7% discount rate, and it's about $40K. [Note that the effect of inflation on this applies to both college tuition and the discount rate; 7% is average real (after inflation) returns to stocks, but if college tuition rises faster than inflation (say an extra 3%, which is consistent with the last 2 decades), you'd subtract that from the discount rate, and the number comes out to about $70K.] So you'd set aside an extra $40K per child when you retire, target $1.08M instead of $1M, and then you have your kids' college funds. "Also, in CA/IL/NJ you could easily spend $15k/yr in property taxes alone." Yup property taxes in VHCOL areas are a big issue. The math still works out though - if you take the budget yupper32 posted down-thread and subtract out taxes and rent, you're spending $1570/month on necessities and have about $1800/month for everything else, more than enough for property taxes. Or just don't live in CA/IL/NJ. "Lastly, the average price of a new car sold in the US is $40k." Amortized over 10 years, that's $4K/year or about $333/month, probably a little less because of time-valued discounting. That's already in the budget below - they list $300/month as car payment.
lkbm 5y ago
TL;DR: $40k/year in exchange for working full time = not wealthy. $40k/year without having to work = wealthy. I consider $40k/year pretty good, and definitely enough for me to live comfortably on here in Austin TX (Source: I've lived here for 13 years now, and I'm only just now getting close to spending+taxes [retirement+charity excluded] exceeding $40k as I've started spending more liberally.) I've got friends here getting by on half that. So no, earning $40k/year as an individual is pretty good. It's only slightly over the 50%ile (but nearly double the 25%ile). Not wealthy. However, having enough money in savings that you get $40k/year without having to work is something else entirely. A 65-year-old with that nest egg is borderline-wealthy. A 40-year-old with that level of savings is solidly wealthy. If you can retire by age 40 and still have a higher income than half the country in your retirement, that's wealthy. Sure, you don't have a private jet, but you do have forty hours extra free time each week.
- PaulDavisThe1st 5y ago
  I agree with everything you wrote here except this: > However, having enough money in savings that you get $40k/year without having to work is something else entirely. A 65-year-old with that nest egg is borderline-wealthy. A 40-year-old with that level of savings is solidly wealthy. Why the difference? The 65 year old is going to be able to actually draw down some of the nest egg much sooner than the 40 year old. The 40 year old will be 65 some day. Could you explain what you mean? Is it just that the 40 year may still earn/save even more money, despite not actually needing to?
  - lkbm 5y ago
    Yeah, I don't have a great answer to that question, but it certainly feels like there's a tangible wealth difference between "I can retire at standard retirement age" vs. "I can retire 15 years early". It's the same a 20-year-old owning a house vs. a 40-year-old owning a house. Same assets, but the former stands out as exceptionally well-off.
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PaulDavisThe1st 5y ago
$40k/yr on $1M is a 4% rate of return. Where are you seeing a guaranteed rate of 4% at this time?
- lkbm 5y ago
  It's not guaranteed, but based on historical average returns for the stock market we frequently assume ~7% growth - ~3% inflation = 4% as the amount you can take out each year indefinitely while your inflation-adjusted principle stays constant. Looking around, a lot of places[0][1][2] are using 10% growth - 3% inflation, so I guess the 4% is the more conservative estimate. [0] https://www.nerdwallet.com/article/investing/average-stock-market-return https://www.nerdwallet.com/article/investing/average-stock-m... [1] https://www.sofi.com/learn/content/average-stock-market-return/ https://www.sofi.com/learn/content/average-stock-market-retu... [2] https://www.fool.com/investing/how-to-invest/stocks/average-stock-market-return/ https://www.fool.com/investing/how-to-invest/stocks/average-...
  - PaulDavisThe1st 5y ago
    If you're planning to live on your investments' income generation, and nothing else, putting them all (and arguably any) in the stock market could be catastrophic. One minor downturn for that last just a few months, and you have zero income. IMO, "US$1M nest egg, live on proceeds" requires guaranteed income, and more or less excludes speculative investment. I appreciate that others opinions on this may vary.
    - jandrewrogers 5y ago
      Under what set of assumptions does a "minor downturn" lead to zero income? I've lived through multiple major crashes that lasted a lot longer than a few months and it had no catastrophic impact on my (theoretical) ability to safely generate an income from public equities. I am having a hard time coming up with a realistic scenario where a responsible person would become insolvent investing in public equities with an expected return of 4% (inflation adjusted). And in practice, most people doing this have a hedge of some type against a protracted downturn -- the cost of the hedge is already baked into the 4% expected return. There is no such thing as guaranteed income no matter how much money you have. The only return that can be guaranteed is a total loss since the value of all assets can go to zero. Picking a different selection of assets, including cash, is just rearranging the set of ways you can lose everything. Most of the retirement risk is a byproduct of having inelastic expenses that run right up against the reasonably sustainable withdrawal rate. That might happen more often with only $1M in the US, but even then it depends on your lifestyle.
Breza 5y ago
I graduated during the Great Recession and got a job as a case worker for soldiers and families in need with a defense contractor that paid <$30,000/year. I lived in the DC area, which is notorious for its high cost of living. So you can definitely make things work on a shoestring budget, even in a pricey area. I guess the question is does that make you "wealthy" if you don't have to work to earn that $40k.

handrous 5y ago

> Can you retire on $40k a year? Maybe in Europe. No, in the US. Not even close. Even with a paid-off house. Certainly not before "retirement age". Health care is the reason.

influx 5y ago
Obamacare subsidies are based on income. You are likely getting subsidies at this level of income. Will it exist for the next 40 years, who knows?
- handrous 5y ago
  A couple years of serious illness for you or anyone you're responsible for (spouse, children) will still ruin your retirement plans, if you try to retire early on $40,000/yr in income. A "Silver" exchange plan, even if the premium were $0/m, would still expose you to so much financial risk ("max out-of-pocket") that you'd be rolling some not-very-friendly dice, trying to retire early.
  - ac29 5y ago
    What is the max out of pocket number that you are seeing that is so financially ruinous? My out of pocket maximum is something like $7000/year. That would be painful on $40k/year, but we're talking about someone with a $1M nest egg, so unless you hit the maximum every single year, its not impossible to cover. Spending $47k/year for a couple years instead of $40k isnt going to financially ruin someone with $1M.
    - handrous 5y ago
      My assumption is that a couple (say) would be running with pretty thin margins, even assuming no mortgage interest or rent and modest living, on $40,000 a year and a fairly low CoL area, so losing another $7k (that's per person, right, not the max-out-of-pocket for the whole plan? Or maybe your exchange plans are way better than ours) would be be very painful, at best. A forever-alone hermit living in a rural trailer park might be another story—there are definitely some circumstances I can imagine in which it might be kinda OK to try to retire before Social Security and Medicare kick in on $1m savings, but not ones that involve anything like a normal life. And sure, you may not be missing payments thanks to the $1m in the bank, but if you start eating that principle too early (=before you're 60ish years old, at a minimum) you might find yourself needing to get a job after being out of the work force for (say) 10 years and while possibly dealing with serious, chronic health problems. I'm not sure how disability works when you haven't worked for a few years due to retiring, and have six-plus figures in the bank still, but my guess would be "it doesn't", until you are, in fact, ruined.
ixacto 5y ago
You can still get ACA subsidies if you fall within the income level it's not means tested, they absolutely designed it this way to be gamed. Also qualified distributions from a ROTH IRA are not considered part of modified adjusted gross income. So do your mega-backdoor ROTH conversion and take out of that and it doesn't count against the insurance-company subsidy.
- handrous 5y ago
  The subsidies don't help with copays, deductibles, and co-insurance, right? Those can run into the five figures even on a "silver" plan, in a bad year. If someone on the plan gets cancer, congrats, now every year is a bad year.
  - lowercased 5y ago
    that's partially true, but... 'retiring' on $100k year is still potentially disastrous if you have a major health issue.
    - handrous 5y ago
      Sure, yeah. My point is mainly that expenses for early retirement in the US have the potential to vary a lot compared to... well, basically any other OECD state, really, mostly due to healthcare. This makes the lower bound for a reasonably-safe early retirement quite a bit higher, such that merely generating enough safe-withdrawal income to live on in a good year isn't enough, even if the markets do exactly as well as you're counting on and that income's steady.
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antisthenes 5y ago

> I once shared this outlook, but when one considers their own ideas about the lifestyle "wealthy" entails, and run some numbers, specifically determine the annual spend for that lifestyle, one will quickly realize the truth. In other words, at some point you underwent lifestyle inflation and didn't realize it. And now you're unwilling to give it up. > Of course this depends on location and cost of living. I am referring to someone in the US. Millions of people raise families on 40k/year in the United States. These are your fellow citizens. Perhaps you can ask them how they do it and whether they are "satisfied" with that level of income and lifestyle.

Glyptodon 5y ago
I think poster is saying $40k a year is fine in LCOL but not wealthy. And it's the yield of $1 mil.
- antisthenes 5y ago
  $40k a year during retirement. That was the original argument. With mortgage paid off and grown kids and social security supplement, $40k is plenty of money.
  - tunesmith 5y ago
    Adding in social security is really moving the goalposts. The discussed scenario is about working for less than ten years, which means much younger than 65-72.
    - yupper32 5y ago
      They're also including a mortgage that's paid off lmao. Yeah totally, $40k is plenty. You just need to not have kids, have a paid off house, no loans, live in LCOL area, get grandma's inheritance, have it come from a retirement account with minimal taxes, hope inflation doesn't kill your $40k over time, hope healthcare costs don't continue to rise, etc....
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tunesmith 5y ago

Agreeing here, but to clarify, a million is probably more like $32,500/year indefinitely. The 4% rule is outdated and was designed for 30-year timeframes anyway.

nostrademons 5y ago

$40K is more than the median personal income in the U.S ($35K as of 2019). Plenty of people would consider $40K/year without having to work wealthy. Even in VHCOL areas, $40K/year is fine if you own your own home and your kids are out of childcare years. VHCOL areas are typically VHCOL because of housing prices and their effect on service-provider wagss. If you take them out of the equation and only need to pay for food, gas, entertainment, utilities, insurance, and depreciation on your car, $40K/year (= $3.3K/month) is plenty.

gnicholas 5y ago
> Even in VHCOL areas, $40K/year is fine if you own your own home and your kids are out of childcare years. Are you considering "childcare years" to include college? Also, in CA/IL/NJ you could easily spend $15k/yr in property taxes alone. That would leave $25k for everything else. Lastly, the average price of a new car sold in the US is $40k. You can buy used, sure, but these days even those are getting more expensive.
- PaulDavisThe1st 5y ago
  So fine, US$40k/yr isn't comfortable living in some places. But it's very comfortable living (given the lack of any need to do paid work) in many others. Context is everything. If you really must live in an expensive part of the USA, then $1M in the bank is not going to cut it.
- nostrademons 5y ago
  "Are you considering "childcare years" to include college?" Somewhat. Personally I think college will be obsolete by the time kids today reach college age. It was a bubble in the early 2000s when I graduated (a significant number of my classmates did not get jobs that make back the debt they took out for it), it's certainly a bubble now, and I think the bubble will have burst in 18 years and people will realize that it's stupid to go to college. But even if you don't believe quite so extreme predictions - the advantage of thinking in balance-sheet terms is that you set aside funds for these expenses and let them compound until you need it. I just ran a NPV calculation on 4 years of college @ $37K/year starting in 18 years with a 7% discount rate, and it's about $40K. [Note that the effect of inflation on this applies to both college tuition and the discount rate; 7% is average real (after inflation) returns to stocks, but if college tuition rises faster than inflation (say an extra 3%, which is consistent with the last 2 decades), you'd subtract that from the discount rate, and the number comes out to about $70K.] So you'd set aside an extra $40K per child when you retire, target $1.08M instead of $1M, and then you have your kids' college funds. "Also, in CA/IL/NJ you could easily spend $15k/yr in property taxes alone." Yup property taxes in VHCOL areas are a big issue. The math still works out though - if you take the budget yupper32 posted down-thread and subtract out taxes and rent, you're spending $1570/month on necessities and have about $1800/month for everything else, more than enough for property taxes. Or just don't live in CA/IL/NJ. "Lastly, the average price of a new car sold in the US is $40k." Amortized over 10 years, that's $4K/year or about $333/month, probably a little less because of time-valued discounting. That's already in the budget below - they list $300/month as car payment.

lkbm 5y ago

TL;DR: $40k/year in exchange for working full time = not wealthy. $40k/year without having to work = wealthy. I consider $40k/year pretty good, and definitely enough for me to live comfortably on here in Austin TX (Source: I've lived here for 13 years now, and I'm only just now getting close to spending+taxes [retirement+charity excluded] exceeding $40k as I've started spending more liberally.) I've got friends here getting by on half that. So no, earning $40k/year as an individual is pretty good. It's only slightly over the 50%ile (but nearly double the 25%ile). Not wealthy. However, having enough money in savings that you get $40k/year without having to work is something else entirely. A 65-year-old with that nest egg is borderline-wealthy. A 40-year-old with that level of savings is solidly wealthy. If you can retire by age 40 and still have a higher income than half the country in your retirement, that's wealthy. Sure, you don't have a private jet, but you do have forty hours extra free time each week.

PaulDavisThe1st 5y ago
I agree with everything you wrote here except this: > However, having enough money in savings that you get $40k/year without having to work is something else entirely. A 65-year-old with that nest egg is borderline-wealthy. A 40-year-old with that level of savings is solidly wealthy. Why the difference? The 65 year old is going to be able to actually draw down some of the nest egg much sooner than the 40 year old. The 40 year old will be 65 some day. Could you explain what you mean? Is it just that the 40 year may still earn/save even more money, despite not actually needing to?
- lkbm 5y ago
  Yeah, I don't have a great answer to that question, but it certainly feels like there's a tangible wealth difference between "I can retire at standard retirement age" vs. "I can retire 15 years early". It's the same a 20-year-old owning a house vs. a 40-year-old owning a house. Same assets, but the former stands out as exceptionally well-off.
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PaulDavisThe1st 5y ago

$40k/yr on $1M is a 4% rate of return. Where are you seeing a guaranteed rate of 4% at this time?

lkbm 5y ago
It's not guaranteed, but based on historical average returns for the stock market we frequently assume ~7% growth - ~3% inflation = 4% as the amount you can take out each year indefinitely while your inflation-adjusted principle stays constant. Looking around, a lot of places[0][1][2] are using 10% growth - 3% inflation, so I guess the 4% is the more conservative estimate. [0] https://www.nerdwallet.com/article/investing/average-stock-market-return https://www.nerdwallet.com/article/investing/average-stock-m... [1] https://www.sofi.com/learn/content/average-stock-market-return/ https://www.sofi.com/learn/content/average-stock-market-retu... [2] https://www.fool.com/investing/how-to-invest/stocks/average-stock-market-return/ https://www.fool.com/investing/how-to-invest/stocks/average-...
- PaulDavisThe1st 5y ago
  If you're planning to live on your investments' income generation, and nothing else, putting them all (and arguably any) in the stock market could be catastrophic. One minor downturn for that last just a few months, and you have zero income. IMO, "US$1M nest egg, live on proceeds" requires guaranteed income, and more or less excludes speculative investment. I appreciate that others opinions on this may vary.
  - jandrewrogers 5y ago
    Under what set of assumptions does a "minor downturn" lead to zero income? I've lived through multiple major crashes that lasted a lot longer than a few months and it had no catastrophic impact on my (theoretical) ability to safely generate an income from public equities. I am having a hard time coming up with a realistic scenario where a responsible person would become insolvent investing in public equities with an expected return of 4% (inflation adjusted). And in practice, most people doing this have a hedge of some type against a protracted downturn -- the cost of the hedge is already baked into the 4% expected return. There is no such thing as guaranteed income no matter how much money you have. The only return that can be guaranteed is a total loss since the value of all assets can go to zero. Picking a different selection of assets, including cash, is just rearranging the set of ways you can lose everything. Most of the retirement risk is a byproduct of having inelastic expenses that run right up against the reasonably sustainable withdrawal rate. That might happen more often with only $1M in the US, but even then it depends on your lifestyle.

Breza 5y ago

I graduated during the Great Recession and got a job as a case worker for soldiers and families in need with a defense contractor that paid <$30,000/year. I lived in the DC area, which is notorious for its high cost of living. So you can definitely make things work on a shoestring budget, even in a pricey area. I guess the question is does that make you "wealthy" if you don't have to work to earn that $40k.