If you’re looking to retire and live the proverbial Life of Riley, I’ve got one thing to say.
Fuhgeddaboudit. Retirement has been done in by Covid-19 and the Federal Reserve.
That’s the message from my annual exercise in measuring how much money we’d need to live somewhat high on the hog. The exercise, which I call the Life of Riley Index, measures the cash investment needed to live at a level better than 75 percent of our fellow Americans.
The joyous benefit of being somewhat better off
Not wildly rich. But definitely not poor. Some readers may sneer at an income under $100,000. But we know for a fact that it’s an income level that a majority of Americans would like to have.
Moreover, I didn’t pick that income level out of a hat. The notion of a somewhat higher than average income is closely related to the income researchers say brings happiness. Equally important, they’ve found that income over that amount brings little additional happiness.
So, it’s an important benchmark.
Why a million dollars really isn’t what it used to be
Sadly, the federal reserve policy of ultra-low interest rates, which is the direct result of the Covid-19 economic collapse, has dramatically raised the ante for living a comfortable life without the indignity of work. With the yield on a 5-year Treasury note recently at 0.31 percent – down from about 1.52 percent last year – the financial assets you’d need to have an income of about $89,000 has soared from an already high level of $5,061,802 to a whopping $7,881,858. That’s an increase of more than $2.8 million in a single year.
More evidence that a million dollars isn’t what it used to be. Really.
In fact, it looks like we’re in a difficult century. Only 20 years ago, back in 2000, the required amount was a piddling $1.5 million.
Low interest rates are the villain
What caused the five-fold increase? One thing: Declining interest rates.
Yes, lower interest rates encourage business investment, open home ownership to more people and make it easier for car dealers to sell cars. But it’s a two-edged sword: Lower yields also make it harder for retirees to cover the cost of daily living.
Much harder.
Is there any good news here?
No, but there’s a bit of relief. While those who aspire to retire at 30 or 40 will find early retirement nearly impossible, most people have the advantage of retiring later with an income from Social Security. That, as you can see from the table below, cuts the assets needed dramatically.
Between assuming a higher withdrawal rate – around 4 percent – and having an average of 40 percent of retirement income provided by Social Security the savings needed drop to $1,335,975.
Unfortunately, that’s still way more in savings than most people have.
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The Life of Riley Index |
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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 Yield | 5 Year Treasury Yield | 50/50 Portfolio Yield | Top 25% AGI Threshold | 50/50 Portfolio Required | Nest Egg Needed @ 4% Withdrawal Rate | Nest Egg needed after 40% 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 |
| 2014 | 1.77% | 1.71% | 1.74% | $77,714 | $4,466,322 | $1,942,850 | $1,165,710 |
| 2015 | 1.87% | 1.62% | 1.75% | $79,655 | $4,551,714 | $1,991,375 | $1,194,825 |
| 2016 | 2.19% | 1.16% | 1.68% | $80,921 | $4,816,726 | $2,023,025 | $1,213,815 |
| 2017 | 2.01% | 1.89% | 1.95% | $83,682 | $4,291,385 | $2,092,050 | $1,255,230 |
| 2018 | 1.82% | 2.75% | 2.28% | $85,439 | $3,747325 | $2,135,975 | $1,281,585 |
| 2019 | 1.93% | 1.52%* | 1.72% | $87,063 | $5,061,802 | $2,176,575 | $1,305,945 |
| 2020 | 1.95% | 0.31% | 1.13% | $89,065 | $7,881,858 | $2,226,625 | $1,335,975 |
| Avg. PF | 3.00% | 5.00% | 4.00% | $89,065
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$2,226,625 | $2,226,625 | $1,335,975 |
| 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 we did the exercise in 2019. During 2019 the yield ranged from 2.62 to 1.32 percent. Recently, the daily Treasury yield curve put the rate at 0.31 percent. | |||||||
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Measuring wealth
Want some idea of scale for the amounts in the table? We can get that by using a wealth measurement tool on www.dqydj.com. Among its many interesting calculators, one will tell you where you stand on the wealth pyramid for any dollar amount of assets. (Those initials, by the way, stand for “don’t quit your day job.”) Having financial assets of $7,881,858 puts you in the top 1.5 percent of all households according to the calculator.
Think about that. You’d need wealth in the top 1.5 percent in order to sustain an income in the top 25 percent. Worse, you’d still need to be high on the hog after withdrawing at a higher rate and taking Social Security. With the required assets of (“only”) $1,335,975, you’d need to be in the top 7 percent.
The bottom line here is simple: If our idea of happiness has any connection to money and income, we’re in for a sorry time.
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 by Pexabay
(c) Scott Burns, 2020
2 thoughts on “Covid-19 Blew Up the Life of Riley Index”
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You state that these ultra low interest rates is a direct result of COVID-19. We have had what I would call ultra low interest rates since 2008. How much longer can it last? I remember the ultra high interest rates of the early 1980’s and thinking that was the new normal. And what about the government debt we are building from all this free money spewing out from the Treasury? No one talks about that.
Like many people who experienced the 60s and 70s, I’ve been waiting for interest rates to bottom and rise. But I’ve been wrong year after year. More important, Japan is an indication that low interest rates can last a really long time.