You can turn off the gas, forget the sleeping pills, and put away the razor. Suicide as a retirement plan will not be necessary.
I say this in response to the multitude of readers who wrote protesting the updated Life of Riley Index. Altogether too depressing, most said. Unbelievable, others wrote, appalled that it would take $2 million in stocks and bonds to replace the wages of two working stiffs with an income from dividends and interest.
In fact, it would take about $2 million in financial assets to replace the earning power of the median income two-earner family. That is a lot more than was required in 1982.
That’s the bad news. If you are 25 and want to be a rentier, someone who lives on the income from investments, this could be very bad news indeed. It means you’ll need a whole lot of capital to live like the nine-to-five crew. Think of it: $2 million just to be able to buy Hamburger Helper, shop at Wal Mart, and drive used cars! Two million bucks and you’ll still feel like an unwelcome interloper when you read Town and Country or contemplate the homes in Architectural Digest. Two million dollars and you’ll still be a poor relative to someone who has Real Money.
Sad to say, the cost of being (or funding) a trust fund baby has risen tragically.
The news about retirement from being a working stiff, however, isn’t so bad. As I pointed out in an earlier column (Sunday, July 5, 1998) the actual amount of money you and I need to put aside to replace our earning power in retirement isn’t nearly as intimidating as our friends in the investment business suggest.
Why?
Two reasons. First, retirement living doesn’t require the amount of income that working requires. Second, instead of paying Social Security taxes, you’ll be collecting Social Security benefits. In addition, for most families, federal income taxes will decline dramatically. You can understand this by examining how the RETIRE Project at Georgia State University develops its figures for retirement income replacement rates. In their most recent study, a two-earner family with income of $50,000 or $60,000 would only need to replace 70 or 67 percent of their pre-retirement income, respectively. Social Security benefits would provide more than half of the necessary cash.
Moving from Working Income to Retirement Income
| 1. Preretirement Salary | $50,000 | $60,000 |
| 2. Less Social Security Taxes | 3,825 | 4,590 |
| 3. Less Federal Income Taxes | 5,670 | 7,734 |
| 4. Less State and Local Taxes | 1,424 | 1,875 |
| 5. Equals Preretirement After-Tax Income | 39,081 | 45,801 |
| 6. Less Preretirement Savings | 2,540 | 3,042 |
| 7. Plus Expenditure Change | (2,311) | (3,709) |
| 8. Equals Post-Retirement Consumption Income | 34,230 | 39,050 |
| 9. Plus Post-Retirement Federal Income Taxes | 432 | 859 |
| 10. Plus Post-Retirement State and Local Income Taxes | 268 | 419 |
| 11. Equals Total Before-Tax Income Needed | 34,930 | 40,328 |
| 12. Gross Income Replacement Ratio (line 11/ line 1) | 70% | 67% |
| 13. Less Social Security Benefit(s) | 19,049 | 21,602 |
| 14. Equals Income Needed from Pension or Individual Savings | 15,881 | 18,726 |
| 15. Percent of Income from Pension or Individual Savings (line 14/ line 1) | 32% | 31% |
Source: Georgia State University RETIRE Project, 1997. Figures assume two workers with 60%/40% split of salary, ages 65 and 62.
Basically, the move from working stiff to retiree can cut the capital cost of financial independence by nearly 70 percent. Instead of needing $2 million, we’re talking about a bit over $600,000.
In fact, the amount required is still lower. While the Life of Riley Index is predicated on taking income from a 50/50 portfolio of stocks and bonds— a portfolio that would do a bit better than inflation— retirees are seldom trying to do more than keep up with inflation. As a result, they can withdraw from their nest egg at a 5 percent rate even when the nest egg isn’t producing an average yield of 5 percent. (When the nest egg is producing more, as it was in the early eighties, they can take all income.)
Think of the table below as The Life of Riley Index, Retiree Version.
The Retirees’ Life of Riley Index
| Year | S&P500 | 5Yr Treas | Median Income | 50/50 Rentier | 32% Retirement Income | 50/50 portfolio yield | Retirement Savings with Min. 5% Withdrawal |
|
1980 |
5.26% |
11.45% |
$24,657 |
$295,117 |
$7,890 |
8.4% |
$94,437 |
|
1981 |
5.20% |
14.24% |
$26,860 |
$276,337 |
$8,595 |
9.7% |
$88,428 |
|
1982 |
5.81% |
13.01% |
$28,073 |
$298,332 |
$8,983 |
9.4% |
$95,466 |
|
1983 |
4.40% |
10.79% |
$29,808 |
$392,469 |
$9,539 |
7.6% |
$125,590 |
|
1984 |
4.64% |
12.26% |
$31,707 |
$375,231 |
$10,146 |
8.5% |
$120,074 |
|
1985 |
4.25% |
10.12% |
$33,411 |
$465,010 |
$10,692 |
7.2% |
$148,803 |
|
1986 |
3.49% |
7.30% |
$35,108 |
$650,751 |
$11,235 |
5.4% |
$208,240 |
|
1987 |
3.08% |
7.94% |
$36,799 |
$667,858 |
$11,776 |
5.5% |
$213,715 |
|
1988 |
3.64% |
8.47% |
$38,702 |
$639,174 |
$12,385 |
6.1% |
$204,536 |
|
1989 |
3.45% |
8.50% |
$40,658 |
$680,469 |
$13,011 |
6.0% |
$217,750 |
|
1990 |
3.61% |
8.37% |
$42,146 |
$703,606 |
$13,487 |
6.0% |
$225,154 |
|
1991 |
3.24% |
7.37% |
$43,623 |
$822,300 |
$13,959 |
5.3% |
$263,136 |
|
1992* |
2.99% |
6.19% |
$45,653 |
$994,619 |
$14,609 |
4.6% |
$292,179 |
|
1993* |
2.78% |
5.87% |
$47,424 |
$1,096,509 |
$15,176 |
4.3% |
$303,514 |
|
1994* |
2.82% |
6.68% |
$48,970 |
$1,030,947 |
$15,670 |
4.8% |
$313,408 |
|
1995* |
2.56% |
6.77% |
$50,989 |
$1,093,012 |
$16,316 |
4.7% |
$326,330 |
|
1996* |
2.19% |
6.07% |
$53,361 |
$1,292,034 |
$17,076 |
4.1% |
$341,510 |
|
1997* |
1.77% |
5.77% |
$55,443 |
$1,470,637 |
$17,742 |
3.8% |
$354,835 |
| 1998* |
1.57% |
4.23% |
$57,660 |
$1,988,276 |
$18,451 |
2.9% |
$369,024 |
Sources: Federal Reserve Bank of Dallas; Census Bureau; Bloomberg; Economic Indicators, Georgia State University RETIRE Project. Median income for 1998 is estimated. ( * denotes a year with a 5 percent withdrawal rate)
As you can see, $369,024 is a lot less than $2 million. If you’ve got it and have Social Security, you probably can give up your day job.
Photo: MART PRODUCTION
(c) A. M. Universal, 1998