This emerged out of the ‘Suze Orman says you need $10MM to retire” thread, and I just can’t let it go.
In defense of Suze’s comments, the Financial Samurai wrote his own blog piece declaring that “
You do need $5MM or more to retire early” (link embedded)
For those unfamiliar with ‘Sam’ - he claims to use math to ‘slice through money’s mysteries’. But what irritated me about this particular post is just how fantastically off-base his math actually was.
At the heart of the post was a hypothetical chart showing what a dedicated saver could sock away in both pre-tax (e.g. 401(k), IRA) accounts and after-tax accounts, and what that would garner using the oft-used 4% WR. Fair enough. ‘Sam’ then concentrated on three stages of this hypothetical retiree (ages 40, 45 and 50) and detailed why a total of $1.5MM, 2.6MM and $4.0MM, respectively were all too little to retire on.
I’m all for using math and running simulations to inform decisions on whether one has sufficient funds to retire, as well as to identify where potential pitfalls and soft spot may be. But here ’Sam’s’ supposedly mathematical approach is littered with holes, omissions and errors.
Here I’ll focus on the middle amount - a 45 year old with $750k in tax-advantaged and $1.875MM in after tax investments for a total of $2.625MM in investments. Why this one? Because its a number that most on the MMM forum would consider beyond what’s needed to retire, but which Sam says is “definitely not enough to retire comfortably if you have family…”
Glaring omission #1 - the existence of those tax advantaged accountsIn Sam’s calculations, the only money this 45 can draw upon are from his after-tax accounts, and only at 4%, yielding ‘just’ $70k ($52k “after taxes” - more on that below). That $750k invested in IRAs appears both untouchable and unimportant (he later mis-states that it cannot be
accessed without a 10% penalty until age 59.5). Even if our 45 year old FIREee decides not to access that money for 14 years, it’s still a valuable asset. The median value after 14 years in a mixed stock/bond portfolio of $750k is $1.73MM. There’s no historical scenario where a 4% WR would deplete a portfolio of mostly stocks + bonds, regardless of which ‘bucket’ the retiree was drawing from.. At worst this person gets a boast around or over a million$ just before their 60th birthday. Yet Sam ignores it. WTF Samurai??!!
If we calculate ALL the investments together, either this FIREee has a WR of just 2.67% (safe under any scenario) OR s/he could withdraw $105k/year wit a 4% WR. Our FIREee would just need to prioritize which ‘buckets’ s/he drew from for the first 14 years, and/or utilize any of the strategies to access tax-advantaged accounts.
Glaring omission #2 - the effect of taxes on LTCGSamurai Sam stresses passive income, mostly from market and RE holdings. Yet inexplicably he’s figured that a person with $0 earned income would see $70k in realized capital gains be diminished to $52k in actual spending
for a tax rate of 31.4% and a total tax burden of $22k! He doesn’t explain how he got there, but it’s certainly not based on the current tax code. This error is made even worse by the fact that
he's written about these very taxation rates on his own blog! Federal tax on LTCG 2019 for couples would be exactly $0 on $70k of realized LTCG. Single filers would pay $4,710 in federal taxes. Maybe Sam was (for good reason) considering Federal + State. Even Short Term Capitol Gains would garner just $7k in taxes (though its unlike a FIREee would have much if any STCG) Well Sam lives in California, and California has the highest rates in the country (up to 13.3% , but only at the 1MM mark). The effective tax rate for San Francisco California is 2.19% for a total taxable burden (Federal + State) of $1,532. It’s possible taxes could be higher with real-estate holdings or other situations, but its also likely that this taxable burden would be even lower, offset in some years by market loses and other deductions and credits.
Tl;dr - $70k earned from market gains would likely leave the our FIREee with about $68,500 in spending; 32% MORE than the $52k claimed. More on LTCG taxes
here.
Glaring omission #3 - no SS consideration whatsoever.I know anytime SS comes up in a retirement context doomsayers come out of the woodwork to proclaim the only ‘safe’ assumption is $0, yet even the most cautious estimates of SS show future underfunding liabilities will
still allow payouts of 74% of the current ‘guaranteed payout’. In Sam’s scenario, our 45 FIREee was in the labor-force for 28 years in mostly well-paying jobs, enough to pay quite a bit into the system and have sizable SS cheques coming his or her way. Yet Sam ignores any and all future benefits. A quick-and-dirty estimation shows this FIREee’s SS benefits could be $1,200/mo starting at age 62 (in 17 years) or $1,600/mo if s/he waited until age 70.5. Discount that to 74% if you like. It’s not a huge sum certainly, but at $14k-20k/year its another level of safety and a nice relief valve on the WR - potentially dropping it below 3% depending on market performance over the proceeding two decades.
Glaring omission #4 - $72k per year is simply ‘not enough’ to live onHere Samurai Sam echo’s Suze Orman in believing that one simply can’t live comfortably on $72k/year. He cites children and caring for aging parents as big barriers which would make this ‘definitely’ not feasible. As shown above (#1 and #2) the retirement picture is decidedly more rosy than portrayed, with up to $105k/yr for this FIREee with a 4% WR. This level exceeds what 85% of American households bring in every year, and over 99% of the global population. Kids can be expensive, especially if you are paying for college, but at age 45 your kids are likely heading off to college or already there. A top-tier education doesn’t have to cost the $300k that Suze and Sam suggest (actually, that would be the exception and not the rule). Round-the-clock medical care for aging parents could run in the six figures, but again that’s the exception and not the norm.
But Samurai Sam is unequivocal:
you need $5MM or more to retire early. Nevermind if you believe your children should shoulder some of their educational costs and consider expense as a factor when plotting their college path. Nevermind if your parents are financially savvy people who have planned for their own advanced medical care. Nevermind Medicare and Social Security and a level of spending twice what the average household lives on. Nevermind most retirees
spend less than they did during their working years, even after increasing spending on health insurance. Nevermind if you intend live in a region or country with normal or lower cost of living, where a nice home costs under $250k and you can live like the wealthiest man or woman in town for far less than $100k per year.
Summary: The most likely explanation here is that the Financial Samurai is a blogger who generates clicks by saying extreme things. If so, point to you Sam. Another likely explanation is that Sam has drunk the dual-flavor Koolaid of Silicon Valley and the financial world which he inhabits, where a $100k salary can seem tiny and starter homes sell for over a million dollars. If so his advice is limited to that small, warped bubble of people who won't venture outside it to realize they could be just as happy spending half as much. If this is the case his blog isn't about 'wealth management' at all, but rather mismanagement. Regardless, his post, ostensibly a defense of Suze Orman's bat s*!t crazy ranting on the FIRE movement is not grounded in reality and gives a false portrait of almost all facets of what it takes to be RE. Your thoughts?
