Rejoice all! The cost of living the Life of Riley declined this year by a massive $700,000.
That’s the good news.
Unfortunately, the decline was from a staggering $7.7 million to an amazing $7 million. Sadly, the number of people who can live the Life of Riley without the inconvenience of work is limited because having money doesn’t do as much for us as having a job.
So, be good to your job!
Riley Returns
Yes, I’ve done the annual update of my Life of Riley Index, a measure of what you need in a simple portfolio of financial assets to provide an income that puts you ahead of 75 percent of all Americans. This year, estimating inflation, it clocks in at $89,805.
Some readers will think that’s a pittance, unaware that when the air we breathe is measured in dollars of income, it gets thin pretty fast. But if my estimates from actual IRS income statistics is anywhere near correct, that $89,805 is what you need to be well ahead of 75 percent of American households.
That means three times as many people may wish they were in your shoes than feel fortunate to be better off than you, poor devil. That $89,805 a year also happens to be the neighborhood where surveys have shown that more income seldom brings greater happiness or satisfaction with life.
Hence, the Life of Riley Index. It’s an income that is comfortably larger than most, but unlikely to attract admiration from those who have their eye on the Forbes 400 list of the richest people in America.
Needing top 2 percent wealth to live at a top 25 percent lifestyle
There’s a problem here, however. According to the distribution of wealth calculator on www.dqydj.com , the required $7 million in financial assets would put you in the top 2 percent of all Americans. (Home equity doesn’t count because it doesn’t earn cash income.)
If you’re raising your eyebrows quizzically, don’t worry. It is weird to need assets in the top 2 percent of households in order to have an income that is less than 25 percent of all households have by simply going to work.
Who knew?
And let’s get real about living high on the proverbial hog: $89,805 a year wouldn’t be enough to pay for a tiny portion of the imagined lifestyles of the top 2 percent.
Just to mention a few painful examples:
—$89,805 wouldn’t be sufficient to pay for daily flower arrangements in the entry of your primary home;
— the annual cost of fuel for a decent yacht that winters in Antigua;
— or the real estate taxes on a simple $4.5 million home in the loftier parts of Dallas, Houston, Austin or San Antonio. (In case you’re wondering, according to realtor.com, Houston leads the pack with 88 homes priced at $4.5 mil or more on the market, Dallas currently has 43, Austin has 42 and San Antonio has only eight.)
But let’s get real. The issue we face isn’t rising inflation in the price of day-to-day items that we buy and use. It’s the rising inflation in the price of all the assets most people would like to acquire – homes, stocks and bonds.
Cutting the required wealth down to size
You can get some perspective on this by considering how much our Federal Reserve-engineered low interest rates impacts the wealth needed to sustain the Life of Riley lifestyle.
— Move the half of money that is in 5-year Treasurys (1.28 percent yield) to 10-year Treasurys (1.65 percent yield) and you’ll cut the fortune required from $7 million to a mere $5.4 million.
— Return to the Good Old Days when stocks provided a yield of 3 percent and good bonds had a yield of 5 percent, and the required fortune plummets to just more than $2.2 million. (See table below.)
Oops! That’s way less wealth, but it’s still up there with the top 5 percent of American households.
There are two big messages here.
First, if you’re aspiring to FIRE (Financial Independence Retire Early), it’s time to redefine the carrot you’re chasing and find a way that is less about money and more about living.
Second, if you’re hoping to retire at the usual time, be encouraged. When you assume a 4 percent withdrawal rate and that about 40 percent of your expenses should be covered by Social Security benefits, the Life of Riley nest egg requirement drops to something over $1.3 million.
The Life of Riley Index, 2021 |
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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 |
| Avg. PF | 3.00% | 5.00% | 4.00% | $89,805 | $2,245,126 | $2,245,126 | $1,347,076 |
| 2021 w 10 Yr T | 1.69% | 1.61% | 1.65% | $89,805 | $5,442,731
|
$2.245.126 | $1,347,076 |
| Sources: IRS data, U.S. Treasury, Bloomberg. Author calculations. For 2018, 2019 and 2020 the income is estimated by adding the inflation rate, each year, to the 2017 income figure in the IRS income analysis. The trailing year inflation rates were 2.1, 1.9 and 2.3 percent for 2017, 18 and 19 respectively. * indicates the yield at the time I did the exercise in 2021. Recently, the daily Treasury yield curve put the 5 year Treasury rate at 0.31 percent. | |||||||
Related columns:
Scott Burns, “The Amazing Value of Social Security Benefits,” 5/23/2020 https://scottburns.com/the-amazing-value-of-social-security-benefits/
Scott Burns, “Living the Life of Riley and the Federal Reserve,” 8/10/2019 https://scottburns.com/living-the-life-of-riley-and-the-federal-reserve/
Scott Burns, “Wealth, Don’t Expect Too Much from It,” 4/27/2019 https://scottburns.com/wealth-dont-expect-too-much-from-it/
Scott Burns, “Huzzah! Living the Life of Riley Costs $1 Million Less,” 7/22/2018 https://scottburns.com/living-the-life-of-riley/
Scott Burns, “Our Wealth Scoreboard,” 8/12/2019 https://scottburns.com/wealth-scoreboard/
Scott Burns, “The Thinness of Wealth,” 5/24/2015 https://scottburns.com/the-thinness-of-wealth/
Sources and References:
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
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, Yachts at dawn, Annapolis
(c) Scott Burns, 2021
2 thoughts on “Affording the Life of Riley, 2021”
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I think any 2020 data on DQYDJ is really as of 12/31/19. Since then, with the rising stock mkt, home prices, whatever, i suspect net worth (and median household income) is quite a bit higher.
So what you call 2021 life is Riley is really 2019 rather than 2021 info.
You’re right about the date on the DQYDJ data source. My Life of Riley Index, however, is based on the most recent IRS data which is generally about 2 years behind. To guesstimate, I add a CPI adjustment to the IRS figure.