I have longed for this day.
At last, The Life of Riley is on sale! While you needed about $7 million to lead the Life of Riley in 2021, you “only” need $4.4 million this year. Estimating inflation, the income you need is $98,657. It takes a $4.4 million portfolio to generate that much per year.
Is this a great country, or what?
The Life of Riley, on sale now
My Life of Riley Index peaked at $7.7 million in 2020. So, we could say that the pretty good life is now available at nearly half price.
Kind of.
If you missed previous columns on the Life of Riley Index, it is my effort to set a baseline for how much you need in financial assets to live pretty well without the indignity of work.
Yes, I know. Work is supposed to be good for us. It gives us purpose, fulfillment and satisfaction.
But there’s a lot to be said for leisure, too. And it’s possible that we eventually outgrow the existential goodness of work. (Some outgrow it at an early age.)
But enough philosophy. Let’s get down to the practical stuff.
Calculating the income Riley needs
Each year I use the latest IRS data to estimate the income needed to support a nicely above average lifestyle. To keep things in what some call “the real world” I’ve set that at an income higher than 75 percent of all US households. That’s well enough off to be secure and comfortable, but not so well off that it would attract the folks with pitchforks. You might even be overlooked by the more organized people with the guillotines. Both groups sincerely believe they have better uses for whatever you have.
Many readers will be surprised by this good news. After all, the cost of living is going up. Fast. The most recent inflation rate, according to the Department of Labor Statistics, is over 9 percent. That’s the highest rate in 40 years.
It’s enough to make me feel young again.
The Good Old Days of Youth and Inflation
Some call 1982 “the good old days.” It was the year Willie Nelson first sang “You Were Always on My Mind,” so it definitely had something going for it. It was also the year Joe Cocker sang “Up Where We Belong,” a song I have a sentimental attachment to because it was in the film “An Officer and a Gentleman.”
But the inflation rate is why interest rates are rising.
The higher they go, the greater the interest income for those with savings.
At last!
This means you’ll need less money to live the Life of Riley. Based on a 50/50 mix of the S&P 500 yield (1.62 percent) and the yield on a 5-year Treasury (2.87 percent), the income from a simple Couch Potato portfolio has risen from only 1.28 percent in 2021 to 2.24 percent this year.
Coming soon…
For better or worse, still higher yields may be coming. The yield on savings is still less than the inflation rate.
The Life of Riley Index, 2022 |
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| This index shows the amount of investment money needed to sustain the income required to be at the 25thpercentile of U.S. household income, given the ups and downs of interest rates and dividend yields. The seventh and eighth columns show the same income for a withdrawal rate of 4 percent and for a withdrawal rate of 4 percent after Social Security provides 40 percent of necessary income, a common Social Security replacement rate. | |||||||
| Year | S&P 500 Yld | 5-Yr T Yld | 50/50 Portfolio | Top 25% AGI | 50/50 PFO | Nest Egg @4% | Adj for Social Security |
| 1985 | 4.25% | 10.12% | 7.19% | $30,928 | $430,452 | $773,200 | $463,920 |
| 1990 | 3.61% | 8.37% | 5.99% | $38,080 | $635,726 | $952,000 | $571,200 |
| 1995 | 2.56% | 6.77% | 4.67% | $44,207 | $947,631 | $1,105,175 | $663,105 |
| 2000 | 1.15% | 6.15% | 3.65% | $55,225 | $1,513,014 | $1,380,625 | $828,375 |
| 2005 | 1.83% | 4.05% | 2.58% | $64,821 | $2,512,442 | $1,620,525 | $972,315 |
| 2010 | 1.98% | 1.93% | 1.96% | $69,126 | $3,526,837 | $1,728,150 | $1,036,890 |
| 2015 | 1.87% | 1.62% | 1.75% | $79,655 | $4,551,714 | $1,991,375 | $1,194,825 |
| 2019 | 1.93% | 1.52% | 1.72% | $86,321 | $5,061,802 | $2,176,575 | $1,305,945 |
| 2020 | 1.95% | 0.31% | 1.13% | $87,529 | $7,745,955 | $2,188,232 | $1,312,939 |
| 2021 | 1.69% | 0.87% | 1.28% | $89,805 | $7,016,020 | $2,245,126 | $1,347,076 |
| 2022* | 1.62% | 2.87%* | 2.24% | $98,657(e) | $4,404,330 | $2,466,425 | $1,479,855 |
| Avg. PF | 3.00% | 5.00% | 4.00% | $98,657 | $2,466,425 | $2,466,425 | $1,479,855 |
| Sources: IRS data, U.S. Treasury, Bloomberg, Morningstar, Author calculations. For 2022 the income is estimated by adding the inflation rate to the year earlier figure. * indicates the yield at the time I did the exercise. Recently, the daily Treasury yield curve put the 5-year Treasury rate at 2.87 percent. | |||||||
Unfortunately, this isn’t all good news. The most common way for stock or bond yields to go up is for their prices to go down.
Not a trick question
Question: What’s the fastest way to double the yield on a stock yielding 2 percent?
Answer: Cut the price in half.
Sadly, that’s not a trick question.
So, if you’re already invested in both, having higher yields won’t be comforting. You’ll be worried about yields going higher still, whether on stocks or bonds.
Making retirement conceivable
What’s the takeaway here? It depends on your age.
—If you’re young and capable of saving a good portion of your earned income, smile. The markets are moving in your direction, making retirement an easier project. Soon it might be conceivable.
—If you’re retired the bright spot is elsewhere. It’s Social Security. The increase in Social Security benefit checks next year will remind everyone just how important that program is.
Editor’s note: This update had been edited to correct for errors in the earlier version. The yield on the 50/50 portfolio was 2.24% last week when the last calculations were made. As a consequence, the portfolio needed for the Life of Riley is $4,404,330, not the $3,404,330 stated in the text and table. And in the table, the portfolio needed at a historical 4% yield should read $2,466,425, not $2,245,126.
Related columns:
Scott Burns columns about the Life of Riley Index: https://scottburns.com/?s=Riley
Sources and References:
S&P 500 yield: https://ycharts.com/indicators/sp_500_dividend_yield
Treasury yield curve data: https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2022
DQYDJ website net worth percentile calculator: https://dqydj.com/net-worth-percentile-calculator-united-states/
DQYDJ website net worth by age percentile calculator: https://dqydj.com/net-worth-by-age-calculator-united-states/
IRS income and tax distribution data: https://www.irs.gov/statistics/soi-tax-stats-individual-income-tax-rates-and-tax-shares
Willie Nelson sings “You were always on my mind,” https://www.youtube.com/watch?v=R7f189Z0v0Y
Joe Cocker sings, “Up where we belong,” https://www.youtube.com/watch?v=X5h02ZmeB5c
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Scott Burns (Oxford, MD: The good life on the Eastern Shore of Chesapeake Bay, 2022)
(c) Scott Burns, 2022
2 thoughts on “The Life of Riley, Now on Sale”
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Hello Mr. Scott,
you had a column/article once (in the recent past I think) that talked about collecting RMD at one shot (on Jan 1) and also visiting Los Cabos I think. I am not familiar with Mexico but somebody suggested Los cabos as a place to visit (they seem to have good weather like san diego, CA). Could you pl. tell me which column that was where you mentioned/talked about Los Cabos (mexico)?
separately, in another column you mentioned that $1,000 a night at the Four Seasons in Austin was outside your price range. What kind of net worth would a (retired) couple need to have to be able to afford that sort of room you think?
Thank you
I don’t remember a column about Los Cabos but I’ve written a bunch about Mexico and retiring there. Suggest you do a simple word search.
How much anyone is willing to spend on a hotel room depends on the occasion as much as on their income or net worth. Most of us develop a kind of price barrier in our heads and have trouble spending more than that particular amount, no matter what the occasion. Personally, when I’m doing regular business travel, I try to keep the room cost below $200 a night. I’ll spend more for rooms at conferences and still more for vacations, but I balk when rates rise over $500 a night.