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Let us play this to the end. Let us say I retire today with $1MM and I am 50. Top 5% in the net worth bracket, right? A safe 4% withdrawal limit gives me about

by vaidhy 3y ago

Let us play this to the end. Let us say I retire today with $1MM and I am 50. Top 5% in the net worth bracket, right? A safe 4% withdrawal limit gives me about $50K per year. Net taxes, it is around $43K or $3580 per month. A two-bedroom apartment in a city will cost around $1700. Medical insurance for me, my wife and one of our kids is around $650. Car expenses (one car paid off, insurance, gas, maintenance) is around $650. Food expenses are $500, utilities around $150 and I am already over the budget. Assuming I get tax credit for the insurance and it is free, I am still right at the edge where my car breaking down is a major disaster. I would like to see how you would budget this..

nwiswell 3y ago
If you have a disaster, you just draw slightly more than 4% for that year. Ideally you have good and/or lean years, as well, but if you don't you might have to way to modestly supplement your income. Also, it's very unusual for a married couple with kids to have a million dollars in retirement savings and no owned home. There's a lot going for owning a home, but in this toy model there's two main factors: 1) Your "housing cost" (mortgage payments) are fixed in nominal dollars, unlike rent, and unlike the 4% draw, which are both fixed in real dollars (and in places with artificially limited housing supply, rent may unfortunately grow much faster than inflation). So effectively, it shrinks over time. Plus you may finish paying off the mortgage at some point. 2) Tax efficiency. Your house can be viewed as an "income producing asset": it produces the value of the rent you'd pay to someone else to stay in it. But you don't pay any tax on that value. Finally, this model disregards Social Security, which isn't insubstantial. If you're Top 5%, you'd probably be drawing pretty close to the max. So you could redline your withdrawals a little bit beyond 4%, knowing that at 67 or so you could juice your income with the SS payouts.
- vaidhy 3y ago
  Thanks. Those are points I did not consider clearly, esp. the SS. While I do own a house, the mortgage, tax and insurance is more than $1700 and hence I moved it out of equation for this hypothetical scenario. My point is that if I get dropped in US with a million dollars, it puts me in top 5% in the wealth category, but I would be living hand to mouth with the fear that the money can quickly disappear. That gives me PTSD :)

by vaidhy 3y ago

nwiswell 3y ago

If you have a disaster, you just draw slightly more than 4% for that year. Ideally you have good and/or lean years, as well, but if you don't you might have to way to modestly supplement your income. Also, it's very unusual for a married couple with kids to have a million dollars in retirement savings and no owned home. There's a lot going for owning a home, but in this toy model there's two main factors: 1) Your "housing cost" (mortgage payments) are fixed in nominal dollars, unlike rent, and unlike the 4% draw, which are both fixed in real dollars (and in places with artificially limited housing supply, rent may unfortunately grow much faster than inflation). So effectively, it shrinks over time. Plus you may finish paying off the mortgage at some point. 2) Tax efficiency. Your house can be viewed as an "income producing asset": it produces the value of the rent you'd pay to someone else to stay in it. But you don't pay any tax on that value. Finally, this model disregards Social Security, which isn't insubstantial. If you're Top 5%, you'd probably be drawing pretty close to the max. So you could redline your withdrawals a little bit beyond 4%, knowing that at 67 or so you could juice your income with the SS payouts.

vaidhy 3y ago
Thanks. Those are points I did not consider clearly, esp. the SS. While I do own a house, the mortgage, tax and insurance is more than $1700 and hence I moved it out of equation for this hypothetical scenario. My point is that if I get dropped in US with a million dollars, it puts me in top 5% in the wealth category, but I would be living hand to mouth with the fear that the money can quickly disappear. That gives me PTSD :)