Yes, the cost of living is going up.
I bet you knew that.
But cheer up. The amount of money you need to invest to afford the cost of living is (still) going down. For the second year in a row. This means that the Great American Carrot is a bit less out of reach. Indeed, it’s at the lowest level, a mere $3.8 million, since 2018.
Higher Interest Rates Aren’t Bad for Everyone
How can this be? Simple. Interest rates are up dramatically. That means you need less in savings to generate any given amount of income. The yield on a 5-year Treasury bill soared from a low of 0.31 percent in 2020, to 0.87 percent in 2021, to 2.87 percent in 2022 and to about 3.92 percent currently. Indeed, this year’s requirement is in the ballpark with the $3.5 million required way back in 2010.
Hopes of being able to invest and live on dividends and interest are back!
We know this from my annual exercise in calculating the Life of Riley Index. This is the amount of money you would need to have, invested 50/50 in stocks and safe Treasury bonds, to provide the dividend and interest income needed to live fairly high on the hog.
Note that I said, “fairly high on the hog.”
Exactly How High on the Hog?
You may want to quibble: My benchmark is the income required to be better off than 75 percent of your fellow citizens. I do this for several reasons. One is that our friends at the Internal Revenue Service make regular reports on the distribution of income on tax returns, so we have a consistent measuring figure.
The other was selected for reasons of national security. Your personal security in this nation, that is. I want the people of the Riley Index to be secure, but inconspicuous. Being better off than most people is enough to make you confident and comfortable.
But it isn’t enough to make you smug. It isn’t enough to make regular purchases of designer clothing something you take for granted. It isn’t enough to pay for dinner in a restaurant that still uses table linens.
More important, however, it’s not enough to draw attention.
The Possibly Life-Saving Importance of Living Discreetly
That’s a good thing. Without the means to buy the Bentley of your dreams or that trendy new Lamborghini SUV, no one will mistake you for a billionaire when the hungry crowds are eager to have fun using the guillotines they built with their Popular Mechanics do-it-yourself kits.
So. Don’t worry, be happy.
All that good news aside, it’s important to note that inflation has pushed the required income to a record high. The income requirement broke into six digits this year, reaching a full $103,218.
No, this isn’t as exact as it looks. It qualifies as a somewhat rigorous guess. The IRS numbers come from their analysis of tax returns. They have to be filed first and it takes a while for them to massage and publish the data. The most recent figures are from 2020 tax returns. Then I adjust for inflation per the consumer price index. In any case, your personal inflation rate may be quite different.
The Normal of the Good Old Days
If we ever return to markets that some would dare to call “normal” – that would be stock dividend yields of about 3 percent and 5-year Treasury yields around 5 percent, things could get even better. The nest egg you’d need would be down to a mere $2.6 million. Better still, if you insist on being a real “normie” and manage to hold your job to age 65, you’ll need even less.
Got Social Security? The Life of Riley Requires Even Less Investment Money
How’s that? Social Security benefits will kick in and will likely cover about 40 percent of your income need.
That will take your nest egg requirement down to a bit under $1.6 million.
Ironically, while the talking heads and hand-wringers worry that rising interest rates will cause the wheels to come off our economy, the same rising rates will put very nice wheels on our retirement vehicles.
The Life of Riley Index, 2023 |
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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. |
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| 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% | $85,272 | $3,747,325 | $2,135,975 | $1,281,585 |
| 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 | $4,404,330 | $2,466,425 | $1,479,855 |
| 2023 | 1.57% | 3.92% | 2.74% | $103,218 | $3,767,080 | $2,580,450 | $1,548,270 |
| Avg. PF | 3.00% | 5.00% | 4.00% | $103,218 | $2,580,450 | $2,580,450 | $1,548,270 |
| Sources: IRS, BLS CPI, author calculations | |||||||
Related columns:
Earlier Life of Riley Columns: https://scottburns.com/?s=Riley
Sources and References:
Five-year Treasury yield: https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202305
S&P 500 yield: https://ycharts.com/indicators/sp_500_dividend_yield
IRS income distribution data: https://www.irs.gov/statistics/soi-tax-stats-individual-income-tax-rates-and-tax-shares
Consumer Price Index (CPI-W): https://www.ssa.gov/oact/STATS/cpiw.html
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 Nicole Michalou, Pexels
(c) Scott Burns, 2023