I hate being the bearer of bad news, but it must be done. While you and I weren’t looking, the cost of living the Life of Riley surged. It rose by more than $1 million in a single year.
Before the Federal Reserve cut interest rates, the surge was less than $1 million. But afterward, it surged to a new record, $4,968,290 from $3,670,790.
Why? The yield on 5-year Treasuries had fallen from 2.75 percent last year to 1.84 percent before the Fed meeting. Earlier this week, in the explosion of trade angst, Bloomberg showed a plunge to 1.45 percent as the world ran for safety. By the end of the day some of the panic wore off. The yield rose to 1.52 percent. With other central banks cutting rates and President Trump working to tweet them down, they may go lower.
The result?
The cost of sustaining an upper-middle-class lifestyle with investment income has soared. Living the good life without the indignity of work has never cost so much.
My Life of Riley index is an effort to reduce the vagueness of “living the life of Riley,” to give it a measure we can ponder. Studies have shown that most people are more likely to feel happy when they see that they are better off than others. So the index tracks the amount of income you need to be at the 25thpercentile, as measured by the Internal Revenue Service. That means three households would have less income, one would have more. Across the entire country, it now requires $85,703 a year.
Money, of course, goes further in some places than in others. I doubt someone with $85,703 a year would get that “better off than most” feeling if they lived in Highland Park or any other high income area. On the other hand, it’s likely that some people pay less for rent in Del Rio than some Highland Park residents spend at Starbucks.
The index tracks how much you’d need in investments to live the Life of Riley without the inconvenience of work. Living without working, of course, is the only true way of living the Life of Riley.
Ideally, you would be “a person of independent means,” able to live the Life of Riley at any age. But I also provide figures for how much you would need to live the life of Riley at a “safe withdrawal rate,” likely to survive for decades.
—This year, if you wanted to be a very young “Life of Riley,” you’d need an impressive $5.1 million in stocks, bonds.
— If you were in your 50s, the figure would be less than half that, $2.1 million.
— And if you were retired and Social Security covered a typical 40 percent of your cost of living, you’d need “only” $1.3 million. (See table below.)
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 25th percentile 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% | $81,973 | $4,203,744 | $2,049,325 | $1,229,595 |
| 2018 | 1.82% | 2.75% | 2.28% | $83,694 | $3,670,790 | $2,092,350 | $1,255,410 |
| 2019 | 1.93% | 1.52%* | 1.72% | $85,703 | $4,968,290 | $2,142,575 | $1,285,545 |
| Avg. PF | 3.00% | 5.00% | 4.00% | $85,703
|
$2,142,575 | $2,142,575 | $1,285,545 |
| Sources: IRS data, U.S. Treasury, Bloomberg. Author calculations. For 2017, 2018 and 2019 the income is estimated by adding the inflation rate, each year, to the 2016 income figure in the IRS income analysis. The trailing year inflation rates were 1.3%, 2.1% and 2.4 percent for 2016, 17 and 18, respectively. * indicates the Bloomberg figure on Wednesday. At the close the daily Treasury yield curve put the rate at 1.52 percent. | |||||||
Do these index numbers tell us anything? Here are two observations.
Youth is not on your side. If you’re young and sprinting for an early retirement, this long period of low interest rates and low dividend yields is not a wind at your back. Today, you gain more by spending less than by investing more. You’d need to save $57,000 to support each $1,000 of income.
That’s a big incentive to scrimp.
Being older helps. Whether you’re old enough to gamble on a safe withdrawal rate or actually retired and collecting Social Security benefits, things look pretty good — the amount you need in savings is far less. It has also been relatively stable.
One thing we know for certain: Low interest rates are not, as some think, a blessing for everyone and everything.
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Related columns:
Scott Burns, “Huzzah! Living the Life of Riley Costs $1 Million Less,” July 22, 2018 https://scottburns.com/living-the-life-of-riley/
Scott Burns, “The dirty, soiled, lousy, filthy and smutty rich,” May 30, 2010 https://scottburns.com/the-dirty-soiled-lousy-filthy-and-smutty-rich/
Sources and References:
Daily Treasury Yield Curve: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
Bloomberg Treasury yields: https://www.bloomberg.com/markets/rates-bonds/government-bonds/us
Morningstar yield quote for S&P 500 Index ETF: https://www.morningstar.com/etfs/arcx/voo/quote
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, Night at Boca Grande
(c) Scott Burns, 2019
2 thoughts on “Living the Life of Riley and the Federal Reserve”
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Mr Scott, I thought you had retired and gone silent, until today when Mr. Hallam gave me the link to this posting. Given that the Bond yield is lower than the S&P 500 yield, what would be a more appropriate ratio than the 50/50 you use?
Thanks
Great! Glad you got a link.
Scott