Author Topic: how long will 1 mil really last?  (Read 10212 times)

sallylee

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how long will 1 mil really last?
« on: March 05, 2016, 04:25:50 AM »
i was wondering if you have 1 million cash and the cash earns 5% interest per year and you are 35 years old will it last you an entire lifetime if you spend $35000 per year and at age 65 you will receive 500 per month in social security? This assumes only money in bank and person does not invest in stocks
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ShoulderThingThatGoesUp

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Re: how long will 1 mil really last?
« Reply #1 on: March 05, 2016, 04:35:21 AM »
Five percent of $1,000,000 is $50,000. That's more than the $35,000 so that person's wealth will grow every year.

Of course, earning 5% on cash in the bank doesn't actually happen.

Mr. Green

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Re: how long will 1 mil really last?
« Reply #2 on: March 05, 2016, 05:49:44 AM »
Five percent of $1,000,000 is $50,000. That's more than the $35,000 so that person's wealth will grow every year.

Of course, earning 5% on cash in the bank doesn't actually happen.
+1.

The answer to your question is yes if you're strictly looking at the math but I can't imagine any bank giving you that kind of return for cash in today's market.

bearkat

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Re: how long will 1 mil really last?
« Reply #3 on: March 05, 2016, 05:50:31 AM »
Also if a bank is paying 5% on a million dollar account, I would expect inflation to be near or over 5%. Our retiree would then have significantly less "real" money to spend each year.

sallylee

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Re: how long will 1 mil really last?
« Reply #4 on: March 05, 2016, 02:22:47 PM »
the reason why i asked was because my friend back in 2005 or 2006 was able to get about 5% with a 10 year cd who knows if he is lying or not. but i do remember back then cd rates were higher

Telecaster

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Re: how long will 1 mil really last?
« Reply #5 on: March 05, 2016, 02:55:50 PM »
the reason why i asked was because my friend back in 2005 or 2006 was able to get about 5% with a 10 year cd who knows if he is lying or not. but i do remember back then cd rates were higher

This is the short history of interest rates:  Back in the early 1970s there was  huge inflationary spike that lasted until the early 1980s.   Any who had cash or bonds lost their shirt, so investors demanded higher and higher levels of interest.   It seem like no matter what inflation just keep pushing up, and interest rates went up even faster to get out in front.    When inflation finally cooled off, there was still institutional fear of inflation and interest rates remained higher than typical for a long time afterwards.

So yes, there was a pretty long period of time when bonds and CDs were a good deal.   But if we go back even farther, we see that typical interest in the US and Britain has been more like 2.5-3%.   And of course,  rates are less than that now, even going negative in some countries.  Which I wouldn't have thought was even possible.   

TL;DR I wouldn't plan on getting 5% or any specific rate of interest over 30 years.   You'll get what you get.   

Spork

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Re: how long will 1 mil really last?
« Reply #6 on: March 05, 2016, 02:58:36 PM »
Back in 2005-6 even regular old online savings accounts were paying out 5% -- the glory days of high interest, which we probably will never see again....

You may be forgetting the 70s and 80s.  :)

plainjane

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Re: how long will 1 mil really last?
« Reply #7 on: March 05, 2016, 03:20:38 PM »
In the late 80s/early 90s I seem to recall a 3 year GIC at 6.8, and another one in the 7s.  I used them to pay for university.

OP - you've been asking a lot of really basic question in new threads, instead of staying in one spot.  You might want to create a case study so people can understand the context you're coming from.

http://www.firecalc.com/ or http://www.cfiresim.com/ might be useful for you to look at retirement scenarios with.

For example, if you had one million, and went with the default 75/25 ratio in FireCalc, you have a 100% success rate of the money lasting at least 30 years.  That means that when they look backwards, there was no year thus far where the person would have run out of money spending 35k/year. "The lowest and highest portfolio balance at the end of your retirement was $87,183 to $6,132,262, with an average at the end of $2,244,804."

marty998

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Re: how long will 1 mil really last?
« Reply #8 on: March 05, 2016, 04:00:45 PM »
Do you have to pay tax on that 50,000?

sallylee

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Re: how long will 1 mil really last?
« Reply #9 on: March 05, 2016, 05:49:55 PM »
assuming only interest income and no other income wouldn't tax be low

Spork

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Re: how long will 1 mil really last?
« Reply #10 on: March 06, 2016, 06:09:54 AM »
assuming only interest dividend income and no other income wouldn't tax be low

I fixed that for you

Dee18

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Re: how long will 1 mil really last?
« Reply #11 on: March 06, 2016, 06:55:46 AM »
Interest on a CD is treated as regular income, not dividend income, by the IRS.

nereo

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Re: how long will 1 mil really last?
« Reply #12 on: March 06, 2016, 07:21:28 AM »
Back in 2005-6 even regular old online savings accounts were paying out 5% -- the glory days of high interest, which we probably will never see again....

I'm extremely skeptical that "we will never see" periods of high interest again.  I hope we never go back to the 20% (!) interest rates seen in 1980 but we've had interest rates above 3% for the vast majority of the last 75 years. Assuming they will never come back seems like the highest level of recency bias.

time will tell.

Spork

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Re: how long will 1 mil really last?
« Reply #13 on: March 06, 2016, 07:22:48 AM »
That was my point. But I probably want being specific enough. If you want to grow money with less taxes you would prefer dividends over interest (especially at today's interest rates.)

patrickza

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Re: how long will 1 mil really last?
« Reply #14 on: March 06, 2016, 12:31:27 PM »
You can get 7% right now in South Africa, not much use to you with inflation at 6.2% and set to rise though :P

JLee

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Re: how long will 1 mil really last?
« Reply #15 on: March 06, 2016, 12:43:49 PM »
the reason why i asked was because my friend back in 2005 or 2006 was able to get about 5% with a 10 year cd who knows if he is lying or not. but i do remember back then cd rates were higher

I'm pretty sure my bank had CDs paying 7-8% in 2006.

sallylee

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Re: how long will 1 mil really last?
« Reply #16 on: March 06, 2016, 02:39:24 PM »
Imagine if you lock in during that time. That would be amazing. I have some ibonds and eebonds but they are useless at rates of 1.4%.

ender

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Re: how long will 1 mil really last?
« Reply #17 on: March 07, 2016, 06:33:44 AM »
You can get 7% right now in South Africa, not much use to you with inflation at 6.2% and set to rise though :P

I was going to ask where the OP lives, because there are definitely places around the world where you can get more than 5% in a savings account -- but have other drawbacks, such as inflation, etc.

plainjane

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Re: how long will 1 mil really last?
« Reply #18 on: March 07, 2016, 08:30:24 AM »
Imagine if you lock in during that time. That would be amazing. I have some ibonds and eebonds but they are useless at rates of 1.4%.

Imagine you had put that money into the stock market at that time and held/bought through the downturn and the subsequent upswing.

soccerluvof4

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Re: how long will 1 mil really last?
« Reply #19 on: March 07, 2016, 09:29:53 AM »
You also asked if it would last a lifetime but later said your friend had a 10 year. I agree with Spartana alot of random questions. Be good to hear what it is your looking for so you can get some solid advice.

redbird

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Re: how long will 1 mil really last?
« Reply #20 on: March 07, 2016, 10:53:52 AM »
Just think, it'll last even longer if you spend less than $35k.

I have room for plenty higher, but my budget goal since I've been FIRE is $2k per month spending (which is $24k per year). A few months I had to spend more than that - like the first few months after I moved from overseas back to the US. I FIRE'd simultaneous with an international move. But every month since then I've spent way less than that.

But remember that once you are FIRE, some of your expenses go way down as opposed to when you were working. I am still using the same tank's worth of gas that I purchased in December. My food expenses have gone down because I cook from scratch all the time now and stopped buying so much pre-prepared foods. I eat out even less than I did before because I have more time to cook and I don't have co-workers pestering me to go out and eat lunch with them. I have time to research deals, comparison shop, and look for discounts.

sallylee

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Re: how long will 1 mil really last?
« Reply #21 on: March 08, 2016, 02:04:27 AM »
There are some guaranteed annuities with fixed rate that are indexed to the stock market that is good for investing.

Telecaster

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Re: how long will 1 mil really last?
« Reply #22 on: March 08, 2016, 09:25:11 AM »
There are some guaranteed annuities with fixed rate that are indexed to the stock market that is good for investing.

We had a thread recently about when philosophically annuities might be appropriate.

But as investments they are horror shows. 


ender

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Re: how long will 1 mil really last?
« Reply #23 on: March 09, 2016, 05:31:15 PM »
Ditto. My expenses went down by almost half post FIRE and I ended up needing a lot less than I planned for - making the stash (and those pre-2008 7% interest earning laddered CDs ;)) go much further. I actually was just planning to take a 5 year break from work rather than retiring but found I was able to retire early instead.

I think that I can see this happening to us too.

I like saving money. Whether it's even more optimizing grocery purchases, being more proactive about buying/selling things on Craigslist, DIY stuff, finding cost effective vacation/traveling, it almost is a game to me.

I cannot imagine that this would be something I would not do in ER.

boarder42

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Re: how long will 1 mil really last?
« Reply #24 on: March 09, 2016, 06:07:53 PM »
I feel like you keep posting the similar hypotheticals every few days. If you don't trust the market and you want to live off of interest baring accounts you're going to have to save a very long time. I don't care to do any of that math for you bc its a waste of time IMO.

Educate your selfnon stocks and become comfortable with them or learn finance math in your free time from work (bc you'll have years extra to figure out how much you can live on if you want guaranteed returns).

arebelspy

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Re: how long will 1 mil really last?
« Reply #25 on: April 03, 2016, 06:43:42 AM »
I absolutely agree with everyone that this isn't a feasible plan--the times when you'll get high returns on cash (or equivalents) tend to correlate with times of high inflation, so you'll still be losing money in real dollars.

No, the scenario in the OP doesn't always work (5% return on 1MM, if you're withdrawing 3.5%), due to inflation.

If you don't trust the market and you want to live off of interest baring accounts you're going to have to save a very long time. I don't care to do any of that math for you bc its a waste of time IMO.

I'll do some of the math on that, because it sounds fun!

Let's look at it a few ways:

1) Let's figure out how high of a return would we need on our cash if we wanted to get the same success rate as a standard portfolio.

If I assume a 4% SWR (25x expenses saved up), and assume a 100% cash portfolio, and use historical inflation rates
Assumed Rate of Return on CashSuccess Rate
1%12.93%
2%25.86%
3%31.9%
4%38.79%
5%72.41%
6%84.48%
7%88.79%
8%99.14%

Even if you could get 7% return on your cash, year after year, every year for 30-years (won't happen), you're STILL at a success rate (89%) lower than a simply 75/25 portfolio.

2) Looking at the scenario posed in the OP (1MM, 5% return on cash, 35k annual spend, historical inflation), it has an 84.48% success rate (coincidentally(?) the same as getting 6% but spending 40k from our table above).  Still a lower success rate than a standard stock/bond mix, and again, the liklihood of getting 5% every year for 30 years seems low.

3) Looking at what WR we'd need to use, assuming various rates of return, in order to get a 95% success rate:
Assumed Rate of Return on CashWithdrawal Rate to Have 95% SuccessAmount Needed to Save
1%1.5%66x expenses
2%1.78%56x expenses
3%2.1%48x expenses
4%2.44%41x expenses
5%2.82%35x expenses

So rather than saving up 25x expenses, to get a 95% success rate, as you would with a equities/bond portfolio, if you want a similar 95% success rate with cash, you'd instead need to save between 35x and 66x your expenses (depending on if you got between 1% and 5% return on your cash).

In other words, you'll likely need to save up twice as much as you would otherwise.  That's a lot of years of your life to give up, rather than learning and becoming comfortable with investing in equities, and with volatility.
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