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My brother is 37 years old and works in a very stable job earning $150,000 annually. He has his own house, a fianceé and a total of $950,000 in the bank (including stocks, real state and bonds). He also has a longtime desire to retire as soon as possible. He is saving for it, and he wishes to retire when he achieves $1 million dollars, next year.

I told him that he is young, and he could work for 10-15 years more before planning his retirement, and that this should be safer. But even though he knows that he could keep his job if he wanted to, it is not his desire. He often quotes self-help lines like "Do not limit yourself", "Your life is not your work. Don't waste it" or "Don't ever get too comfortable".

I also told him that he could get his math wrong. He stated that with $1 million dollars he could spend 4% each year or $40,000 without worrying about inflation rate. This could pay for his spendings (food, healthcare, clothes), including leisure (he loves to travel once or twice a year).

He is NOT going to work anymore. His idea is to spend time with his hobbies (reading, meditation, piano), exercising and writing books that he could one day eventually sell. If needed, he could earn an extra income by teaching piano to the kids in the neighborhood or self-translate books to French (he is fluent), but more as a hobby than as a work. I'm also worried if he is expecting that his fiancee/future wife could help with her income to support their future kids or unexpected expenses.

My question is: is he realistic? I'm worried because if he spends all his money by the time he is 60 years old, life is going to be tough not only for him, but for his future wife and his family (myself included, I guess). What other concerns should I raise in order to confirm if he knows what he is doing and also to not get my parents as worried as I am?

UPDATE: As requested, I'm adding a USA tag, even though he has dual citizenship and plans to live in west Europe after retirement (not in the near future, though). Healthcare is indeed a clear advantage there. My sister already lives and works there.

Ben Miller
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Chaotic
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    "Including real estate". It's not very easy to cash out and live off it without becoming homeless in the process. – mathreadler Jul 12 '18 at 12:36
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    Is he currently actually saving $110k of his salary per year? If not, his expectation of going from a $150k salary to a $40k self-allowance is totally unrealistic, and that's not even considering highly-probable future expenses like healthcare and children. – Nuclear Hoagie Jul 12 '18 at 12:57
  • Not enough to add as an answer, but has he considered working part-time, i.e. have more time to himself but also have a decent income still? – Bad_Bishop Jul 12 '18 at 13:08
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    @NuclearWang - $150k gross has a big tax bill to pay first. Your point is well taken, and part of my own answer. Is he really living on $49K? That’s the question. – JTP - Apologise to Monica Jul 12 '18 at 13:12
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    Has your brother consulted a financial planner at all? If he isn't going to listen to you, there's the chance that he may listen to a professional. Even if you can't convince him not to retire, you might be able to convince him to consult a professional under the pretense of figuring out how to best organize his assets. Then the professional can hopefully tell him how bad of an idea it is. – David K Jul 12 '18 at 13:34
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    Just to make sure... is the $950K net of any mortgage/debt? – JayCe Jul 12 '18 at 13:43
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    I didn't see a mention of what country he is in. This makes a HUGE difference. It has been stated that one never sees on a tombstone "I only wish I had spent more time at the office." I retired for a few years with much fewer resources and when very, very much older, and successfully "unretired" later. A financial planner is interested in generating income for himself, and it sounds like bro is doing fine without one. You don't state that, but it also sounds like he is more materially successful than yourself. If so, why would he listen to your advice on such matters? More power to him! – MickeyfAgain_BeforeExitOfSO Jul 12 '18 at 14:06
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    Some related reading on the 4% "safe withdrawal rate". Going from $150k to $40k is quite a lifestyle change, but if he's already living at a $40k lifestyle saving ~$110k each year then it may not be as drastic a change as others seem to be making it out to be. – zzzzBov Jul 12 '18 at 14:18
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    "I'm also worried if he is expecting that his fiancee/future wife could help with her income to support their future kids or unexpected expenses." FUTURE KIDS? A Department of Agriculture report for 2015 states that the cost to raise a child born in 2015 through the age of 17 hit $233,610. Last year, a Time magazine article put it at $250,000 per. Again, Big Bro is delusional if he wants to procreate unless he is going to do Daddy Day Care to raise the children and his future wife makes really good money and the arrangement is acceptable to her. – Bob Baerker Jul 12 '18 at 14:39
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    What does he do for a living ? – Cloud Jul 12 '18 at 15:41
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    @NuclearWang he doesn't quite have to be saving $110k. As a single, high wage earner he is probably paying a lot in taxes, which would drop drastically as a marrried, $40k-a-year earner. – stannius Jul 12 '18 at 16:08
  • But he does not say earn, this is 40k post taxes (living expenses), the way I read it. Which means that profits are to be taxed first, meaning more income to get so much left over. – TomTom Jul 12 '18 at 16:18
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    @BobBaerker "unless he is going to do daddy day care..." well why wouldn't he? If he's not tied to a 9-5 it seems like this is the natural choice. That's not to say the rest of the math checks out, but at least this is one expense that can easily be eliminated. – CactusCake Jul 12 '18 at 18:13
  • Given the USD I'll assume this is US, but where does he live? $40K goes a lot further in Memphis than it does in Mountain View – Gramatik Jul 12 '18 at 18:26
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    @BobBaerker Can you clarify what you mean by "will need $133,000 to cover their health-care costs in retirement"? Does that mean a 65-year old will need that as a lump sump and will cover all their healthcare costs until they die? And does this include any assumptions about what kind of returns, if any, this amount is getting while waiting to be spent? –  Jul 12 '18 at 18:28
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    @Michael - It is the projected total lifetime expenditure for a healthy person retiring at 65. Fidelity does an annual estimate for those with traditional Medicare coverage and considers premiums, co-payments, deductibles, and out-of-pocket drug costs associated with Medicare parts A, B, and D It does not include other health expenses such as over-the-counter medications, most dental services, going to a nursing gome and long-term care and does not factor in any employer-provided retiree health coverage. The $280k lifetime estimate for a couple has increased 40% in the past 15 years. – Bob Baerker Jul 12 '18 at 21:36
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    @CactusCake - Daddy day care doesn't solve the problem. The quality of the wife's employment is the key ($$$ and employer provided health insurance). Without anything from the job, the average cost of health insurance plus deductible in 2017 was $9k for an individual and $20k for a family of four. Projected survival on $40k is delusional. – Bob Baerker Jul 12 '18 at 21:48
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    $950,000 in the bank (including stocks, real state and bonds). this doesn't make sense and without knowing a debt load this question is impossible to answer as illustrated by the 16 attempts to answer it. – quid Jul 13 '18 at 00:13
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    Just to have this perspective: a million dollar was a lot of money when he was a kid. (Around 3 Million in todays worth, although these calculations have flaws). And in 30-40 years will probably be worth only 400k. He is overestimating the value of what he has now. – lalala Jul 13 '18 at 08:24
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    @lalala Even very low risk investments should outpace inflation over 40 years, so the effects of inflation you're talking about are pretty much irrelevant. – Michael Jul 13 '18 at 10:05
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    @Michael Well, you cant have your cake and eat it. Either you use the return to keep it up with inflation or you use the return to live on (as suggested in the question). To be able to have both you prob nee 6-10% return consistently. Try that with a low risk investment – lalala Jul 13 '18 at 11:28
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    If his job is very strenuous and he is at risk of hearth attack or madness, then he may be right. In all other cases he is too young for retirement. He will understand it after few years when return to job and current income may be impossible. – i486 Jul 13 '18 at 12:57
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    @lalala: Historically, the US stock market has returned an average of about 7% per year after inflation. So assuming a 4% withdrawal rate, his principal should actually grow. – jamesqf Jul 13 '18 at 16:44
  • @NuclearWang not necessarily. Maybe his working life makes certain demands for spending which his non-working life would not make. Most jobs are in bigger cities where accomodation is more expensive than in smaller cities. Maybe you need a car to get to work but if you had no work you might not need one. Food while working might be more expensive. – mathreadler Jul 13 '18 at 18:52
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    Just a single data point: Living on $40k when your house is paid for is very realistic and allows for a reasonably luxurious lifestyle. I've been in that position for a couple years (before I sold and bought a bigger house), and you can absolutely live on that amount nicely, including holidays. I actually lived for much less, without intentionally saving anything. – Tom Jul 14 '18 at 05:50
  • There's a great moment in "That 70's Show" where Kitty is talking about how she had to re-enter the workforce, and how her husband didn't like it at first. But she sat him down and said she understood but then told him "Red, we're going to lose the house." Point being is that if your brother's goal is unrealistic, and he can't realize that now, he will in 5 or 10 years when he really feels the lifestyle bite. And if he never realizes it, he's probably doing good enough. If he can pull in 150k now, he'll still be valuable when he realizes he has to go back in a few years. – Anthony Jul 14 '18 at 06:19
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    I have not lived in the US where it seems question is asked, but I agree with @Tom this whole question is likely just a bait for poorness-complex. No one earning that much can not conceivably not see that it's very possible to live on $40k (or much less than that) a year. It's probably just made up story to try make people angry/jelly. – mathreadler Jul 14 '18 at 08:28
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    He has much more success retiring earlier if he moves to a cheaper country with state sponsored health, like France, Spain or Portugal, or even more cheaper countries in Asia where spending 20-30K will allow you to live like a king. – Rui F Ribeiro Jul 14 '18 at 17:22
  • Thank you all for your comments and answers. He is in USA right now, but one of his plans is to move to Portugal/Spain, where healthcare is covered by the state, as @Rui has said. He does not have any debts (no mortgage loans), but I'm not sure about his specific savings (how much is in stocks, bonds, real state, etc). I know it is difficult to calculate this, because it depends on his choices, like where to live, which city, how many children and so on. – Chaotic Jul 14 '18 at 17:42
  • @BobBaerker, if a child costs $233,610 from birth to 17 years, than it's doable to use your 40K/year. Because you don't spend all the 233K in the same year - the cost is divided by the whole 17 years, and we have to consider that some caring costs will not be there as he will be available there all day long (I guess). – Chaotic Jul 14 '18 at 17:45
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    @Chaotic - I think you've lost focus because the hubby is the one at home. Normally, the wife is. Swapping one for the other isn't going to reduce caring costs. Either way, it will cost $233k to raise the child. That's nearly $14k per child per year. Unless you live in Appalachia, it's just not a viable hypothesis for the general population that you can live on $40k per year. – Bob Baerker Jul 14 '18 at 18:10
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    Sounds like he has worked hard but doesn't want to anymore, and needs a break. There are plenty of options in between "die from overwork" and "retire completely" that it doesn't seem like he's considering. Also doesn't sound like he's truly considered the realistic costs of raising a family, or the goals/desires of his fiancée. If he has dual citizenship & speaks fluent French why not move to the EU, raise bilingual kids, and find some job that allows for better work-life balance, free health care and 6-9wks paid vacation every year? He shouldn't retire yet, but maybe he needs a change. – mc01 Jul 16 '18 at 17:50
  • 2017 USDA report: The amount a family will spend per child varies greatly based on the family’s income, as well as where it lives. Lower-income families are likely to spend $212,300 per child through age 17 while higher income families will spend more than double that, or about $454,770. For parents earning between $59,200 and $107,400 the estimated cost of raising a child born in 2015 from infancy to age 17 is now $284,570 . Additional cost of $83,080 to $187,800 for college education (public vs private). – Bob Baerker Jul 16 '18 at 22:10
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    whoa! people in USA want to leave $150,000 for hobby and here in INDIA people like me are struggling to get $12,000 annually working more than 40 hrs per week :( – Nitin Sawant Jul 17 '18 at 06:59
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    Ya and your rent probably isn't $2,000/month. Different economies have different economics.... – quid Jul 17 '18 at 17:56
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    I don't know where this $233,000 per child per year comes from, but need I point out that it's an absurd number? Assuming 18 years that comes to $13,000 per years. My wife and I raised 4 children at a time when our income was considerably less than $52,000. Okay, inflation since then, but lots of people have income less than $13,000 times number of children and are doing just fine. Maybe upper income people in high-cost states spend that much. – Jay Jul 17 '18 at 19:22
  • How much is his house (and would he be willing to mortgage it for extra funds?) – Dennis Jaheruddin Jul 18 '18 at 10:50

22 Answers22

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I retired at 40, with well over $1M in actual investments. But I not only had to deal with a major market crash, but also dramatic life changes that increased my living costs dramatically. We had two kids, one of whom who turned out to require hundreds of thousands in medical care that wasn't covered by my self-employed insurance. I found it's really hard to cover all the eventualities that can occur in decades years of retirement without having a substantial margin of safety in your retirement accounts.

And that wasn't the worst part. One of which was the boredom. Even though I pursued all the interests I had, they never fulfilled me like my career did for me. It's also much harder to motivate yourself to achieve personal goals when you don't have to get up early, can finish your projects whenever you want, leave on vacations at the drop of a hat, etc, etc. And even when things were going well, it was frustrating to know that I was unlikely to ever be able to increase my standard of living.

And a decade later when I was forced to return to work I had to take jobs with significantly lower responsibilities and paying far less than what I had been used to.

My recommendation is he needs a much larger buffer, after a few years spending only $40k a year he's very likely to say, "is this it?". If he truly wants to quit cold turkey, he should work until he has at least a $2M net worth. That way he has a chance of continuing to grow his net worth and deal with unexpected problems. And he's not that far away. If he invests well and continues to save at a high rate, it could be as little as 5-10 years away.

If that's too frustrating for him, I'd recommend he develop a transition plan to ease into retirement, focused on making life more enjoyable, instead of maximizing income. If he can work fewer hours start devoting the extra free time to getting his side interests going. It's a great test of how much he'll enjoy them in retirement. And if any start generating income then quitting his job becomes more reasonable.

SafeFastExpressive
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    Retirement is advertised as the greatest thing ever. It really isn't. It's one thing to spend couple hours a week on a hobby. It's completely something else to do that for 8-12 hours a day. – Nelson Jul 13 '18 at 07:49
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    @Nelson it would probably be better for quite some peoples health to do more slow-down of work, one hour less a day every few years or something. Going from 100% to 0% can probably be a dramatic and sometimes unpleasant turn for many. – mathreadler Jul 13 '18 at 19:05
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    "One of which was the boredom" - a former coworker won 10mil in the lottery, and kept working his "push AV carts and do audio setups around the school" job for 5 years until he hit his normal state retirement (60, 35 years service). He was afraid of the boredom and could easily see himself turning into an alcoholic because of it. He partied it up for a year post retirement, then his steady girl retired as well and they've been enjoying it all together - her kids and grand kids, etc. Easy to do with a post-tax annual income of $200k-ish... kinda hard on $40k, esp considering insurance,etc – ivanivan Jul 15 '18 at 15:04
  • Why $2M rather than $1.8M or $2.5M? If he had $2M today would you recommend retiring now? – Myles Jul 16 '18 at 17:35
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    $2M was just a rough guess. It should be enough for financial flexibility. If he retires on $40k on a $1M portfolio and the market crashes 40% his withdrawal rate jumps to 6.7%. His principle and future income are permanently damaged. But start with $2M only requires drawing 2%, and even during a market crash his withdrawal rate is below 4%. And in most years a 2% withdrawal rate should increase principle, even adjusting for inflation. For example, in 5 years he finds he needs $80k a year to live on, his portfolio is $2.2M+ and a withdrawal rate under 4% can generate that. – SafeFastExpressive Jul 16 '18 at 19:39
  • Guess it also depends on how the previous work was like. If one has always been an employee in a company hierarchy, then suddenly having no work obligations to others and no deadlines imposed can indeed be a dramatic change. If one had already been working on their own (e.g. freelancer, contractor, business owner) and needed to set their own schedule and deadlines for a long time, then maintaining some standard of productivity even after retirement shouldn't feel that hard to get used to. – xji Jul 17 '18 at 16:51
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    @xji the catch 22 is if they're in the second scenario, they can already scale down their work hours as they please, down to 0. I don't think this question would even apply to case 2. – Nelson Jul 18 '18 at 06:10
84

The question is "personal relationship" as much, if not more, than personal finance. It's one thing for a single person to make this decision, but another thing altogether to make such a decision pre-couple. And that's the piece that isn't fully addressed in the question.

Is the fiancée in agreement with this? (You seem afraid he expects her support, but where does she stand?)

Has he created the budget he expects to live on? He is likely missing some important details. Starting with the origin of the 4% rule. He should understand that the rule offered a probability of money lasting 30 years, coinciding with a retirement at 65 or so, and lasting till 95.

He's also lived off a gross $150,000, and even though he's saved really well, he's also been able to address unexpected expenses from his income, not needing to tap savings.

Let me offer 4 items that he likely overlooked -

  • College Costs: Part of my own ability to retire early, at 50, was that we had saved for college, 100% for our one child. In Bro's case, he will have enough savings so his child(ren) probably won't qualify for aid, but he'll also not have set aside anything to help them out. A bad combination.

  • Social Security: My wife and I didn't have our full 35 years working, but had high enough income to get a decent Social Security check. This offers a safety cushion taking our budget from the 4% or so down to 2% of retirement savings. (i.e. even though we started with the 4% rule, we know we'll have some Social Security benefit that will drop our withdrawal rate by nearly half).

  • Health Care: If the fiancée doesn't work or works at a job that doesn't offer medical coverage, this can be a huge expense. And it will get more expensive each year until medicare kicks in at 65. Again, it was part of our retirement budget, and at 65 (Just over 9 more years) it will lessen greatly as we go to Medicare.

  • Mr. Mom: Say fiancée does work. Kids come along. Does he expect she'll pay for childcare? And leave Dad at home to just hang out? This will make for one very unhappy wife. (Disclosure - we both worked, had childcare during the day, and at night, I was an equal partner, both in the house chores, and in parenting.)

My concerns are about the finances and the personal issues your brother seems to be getting into. Unfortunately, when people are set on a plan, they also aren't likely to be open to listening to the objections.

Giacomo1968
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JTP - Apologise to Monica
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    Hi Joe, not sure where you got 30 years from. Mr Money Moustache, who originated this idea based 4% on average returns without ever touching the capital, so it lasts as long as you do basically. – Cloud Jul 12 '18 at 15:55
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    Look up “Trinity Study”. That was the first that I’ve seen the 4% rule stated. I didn’t say money doesn’t or can’t last longer, only that the probabilistic assumptions are typically based on 30 years, or at least that’s what the study used. I’ve met MMM and respect his approach, but he was not the inventor of the frugal early retirement. Although I wouldn’t argue that he’s perfected it. – JTP - Apologise to Monica Jul 12 '18 at 15:57
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    The 4% rule definitely should also be accompanied by a separate couple of years in reserve, not to be touched. If you would have followed that approach in the market crashes of 1929 or 1987, then you would have lost your hole planning - a 5 year reserve is a must. – TomTom Jul 12 '18 at 16:17
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    @stannius He publicly posts his accounts each year. He SPENDS 26k per year. For a 4 person family. – Cloud Jul 12 '18 at 16:22
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    @TomTom or the decade of 2001-2010. At least that was recent enough that it should be part of his own history. The 87 crash was nothing. The 1987 market return was positive with dividends. Unless someone made the decision on 8/25/87 to retire, in which case, I’d agree 100%.. – JTP - Apologise to Monica Jul 12 '18 at 16:34
  • Yeah, but we are quite high in a multi year rally. I would not risk being depending on a crash NOT coming now ;) For investors the current stock market is - challenging. – TomTom Jul 12 '18 at 16:42
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    I think we are on the same page, Tom. Those who ignore history are doomed to repeat it. But I have found that young people who have not experienced things firsthand have trouble learning from history that goes too far back. – JTP - Apologise to Monica Jul 12 '18 at 16:46
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    They do. People are also extremely crappy at assessing tail risk (i.e. the low chance once every 10 year catastrophic event) assuming it will not happen. – TomTom Jul 12 '18 at 16:48
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    @JoeTaxpayer I was hoping you would answer, but I would you also address how you stay mentally active and healthy? I have notice retired people becoming brain washed by their favorite news channel, and it is an ugly deterioration of mental capacity. – Pete B. Jul 13 '18 at 12:21
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    I still call myself retired, but one year in, I got a 2 day a week gig at a high school, as an in-house math tutor. Yes, it's paid, about $10K/yr, but not the 6 figures I made pre-retirement. See this answer in MathEducators.SE as an example of how much I love this part time gig. I have a gym in the basement, and am on track for my 1000 mile/yr goal. And I have other hobbies and interests that keep me going. /cont – JTP - Apologise to Monica Jul 13 '18 at 12:30
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    My role at the school is unique. I'm never looking at the clock, happy to meet students early (Any teenager that's willing to meet me at 7am is worth me getting up extra early), and not rushing out at 3PM. I consider it no different than volunteer work, which is what I'd imagine many early retirees do. This year, a teacher left school 6 weeks before year end, and I had the chance to teach 2 real classes. It was rewarding, but too much like real work. Most year end student reviews asked why I don't do it full time. "Because i'm retired!" – JTP - Apologise to Monica Jul 13 '18 at 12:33
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    @JoeTaxpayer I retired early myself and agree with the answer. However, I feel that "Healthcare costs" should be highlighted and bolded. Even though I fully anticipated that healthcare costs would rise faster than general inflation, the increases in premiums / deductibles / co-pays etc have significantly exceeded my expectations, and years to go until Medicare. As for Social Security, one should consider that payments will be reduced (current expectation is it will pay 70 cents on the dollar) when the trust fund runs out of money by 2035 at the latest. – njuffa Jul 13 '18 at 19:28
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    @njuffa I am answering a question to the sibling of a guy who isn't likely to listen to her/him let alone a bunch of strangers, no matter how bright the wisdom of our crowd may be. I don't know that any greater emphasis on this would matter to him. (But, of course, I agree, it's the most frightening thing on the list) – JTP - Apologise to Monica Jul 13 '18 at 20:30
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    @Cloud He also travels the world as an invited speaker and conveniently leaves that out of any annual income / expenditures. It makes it feel a bit like a Bear Grylls "real" survival show replete with hidden support and camera teams. – Eric Jul 14 '18 at 14:16
  • @Eric: I don't see how MMM's travel & speaking should count as income, unless it's something that he enjoys enough that he'd pay for it himself if other people didn't. You'd have to pay me WAY more than I earned at the peak of my salaried career to get me to do it. – jamesqf Jul 14 '18 at 17:07
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    @jamesqf It's still not a fair comparison for people that really need to live with the means that they have. MMM acts like he is, but he really has many more resources available to him, especially if he is a paid speaker. – Eric Jul 14 '18 at 17:50
  • We are fast approaching the point where "getting a room" may be appropriate. The conversation is polite enough, but morphing into "extended discussion" that's a tangent to the answer I present here. – JTP - Apologise to Monica Jul 14 '18 at 17:54
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    Comments are not for extended discussion; this conversation has been moved to chat. – GS - Apologise to Monica Jul 15 '18 at 17:40
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Assuming your brother dies at 90 and retires now (37), he has to be able to live off his investments for 53 years. using this calculator: https://www.firecalc.com/ with the following numbers: spending: $40,000 , Portfolio: 1,000,000 and years: 53 your brother has an 81.9% chance of dying with money left over. Assuming he can indeed live off 40K a year (inflation adjusted) for the rest of his life, it is realistic but slightly risky.

Brythan
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Flanor
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    It also assumes that $1M is mostly liquid; the net worth is described as being in real estate as well. It's unlikely to appreciate as fast, and harder to tap (reverse mortgages are a thing, but they're not available to 37 year olds typically, and would presumably pay out less than equivalent market invested funds). – ShadowRanger Jul 12 '18 at 12:48
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    Yeah. I generally would NOT include my owned house at all in the retirement reserves. If that is half the money, then this gets ridiculosuly low with the rest, if the net worth is a million. – TomTom Jul 12 '18 at 13:39
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    OP mentioned "He has his own house [...] and a total of $950,000 in the bank", I'm under the impression that the house he lives in is separate from the 950k in cash/bonds/real-estate. – Aubreal Jul 12 '18 at 14:14
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    @ShadowRanger it's not clear what form the "real estate" portion of brother's portfolio is, but if it's rental properties, then brother can get income from them without a reverse mortgage. In fact, that could really help him, because rental properties are part investment and part job, so it could be a way for him to monetize a small portion of his time as well (which would significantly increase his odds of success). – stannius Jul 12 '18 at 15:57
  • There is a significant problem wit hthat - in that if they are rental, he also needs to start saving. Even if they are new, they will need major investments down the road.Remember the timeframes we talk about here. Living standards change - so rental properties will need upgrades. – TomTom Jul 12 '18 at 16:07
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    I got a rental propertly some years ago for cheap and the guy in there died (after living in it for 51 years). The necessary core renovation was about half the market value. Heck, we had to replace ALL wiring, install a proper bath (standard DO change in 50 years). – TomTom Jul 12 '18 at 16:15
  • Nice calculator, thanks. Good to know that 3% has historically worked 100%, and 3.5% for all but a few specific periods. – Kevin Jul 12 '18 at 17:46
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    A one in five chance of dying in poverty is not slightly risky, it is absurdly risky! If you had a one in five chance of dying in a car accident tomorrow would you say that was a slight risk? – Eric Lippert Jul 12 '18 at 19:11
  • The only way to "adjust for inflation" is to keep the money invested. Savings accounts have negative interest rates, when adjusted for inflation. – Acccumulation Jul 13 '18 at 01:38
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    @EricLippert: One-in-five risk over a lifetime is completely different than one-in-five risk of an event tomorrow; they're not comparable. – R.. GitHub STOP HELPING ICE Jul 13 '18 at 03:19
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    @EricLippert: keep in mind that the one in five chance assumes the brother takes now additional action. When his investments crash in the first few years after retirement he can still go back to work or start spending less until his investments have recovered. – Flanor Jul 13 '18 at 13:36
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    @EricLippert It's a 18.1% chance of failing to live off his savings with a 4% withdrawal rate over 53 yeas, not of dying in poverty. He can dramatically reduce the the odds of dying in poverty by working or cutting expenses during lean years and not increasing his expenditures during good years. – UEFI Jul 13 '18 at 14:02
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    Also, it's not 18.1% of living in poverty, that covers him dying just exhausting the last $40k, dying with $1k in debt or with a lot of debt. If you're 85 and just taken out a new 30 year mortgage on your primary residence, are you really in poverty when you die, even though your net worth is negative? – iheanyi Jul 13 '18 at 16:04
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    @R..: Re " One-in-five risk over a lifetime...", you also have to consider that the chance of him dying before 90 is a lot higher than 1 in 5. Google says a 65 year old man has a 10% chance of living to 90, so the chance of him living in poverty at 91 is really less than 1 in 50 :-) – jamesqf Jul 13 '18 at 16:53
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    @iheanyi: would a 85yo get a 30a mortgage (or any mortgage at all)? (Over here, people say it is really difficult to get pretty much any mortgage once you are retired - the problem is discussed in the context of people retiring at 65 and trying to take out a mortgage to adapt their home to old-age needs) – cbeleites unhappy with SX Jul 14 '18 at 11:22
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    @cbeleites without an income, it makes no sense for a bank to give you a mortgage. You have no means to pay them back! – Nelson Jul 16 '18 at 05:18
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    @Nelson: Look up "reverse mortgage". Essentially the company pays you a monthly sum, and gets the house when you die. – jamesqf Jul 16 '18 at 05:23
  • @Nelson: a) and that is a point to be considered for the question here: availability of credit will (should) be tightly bound to the borrower being in a situation where the lender can rely on getting their money back. Unusual lifestyle decisions that turned out to not work well (otherwise there wouldn't be the need for credit) will probably be counted as high risk. At least IMHO they should. b) The discussion here in Germany is about people who do have a predictable income via their pension plan - far more predictable on a time frame of say 10 years than yields of investments. – cbeleites unhappy with SX Jul 17 '18 at 11:08
  • @jamesqf: Sure, the probability to live to that age needs to be considered. OTOH, health and old age care costs (which are a huge part of the total costs) are better described on a time scale "x years before death" rather than at absolute age. I.e. lifetime spending of someone dying at 75 often isn't that much less than the lifetime spending of someone dying at 91. The more important difference would be immediate death in an accident or the first heart attack vs. surviving those events by some years or having (not even necessarily dying of) cancer. – cbeleites unhappy with SX Jul 17 '18 at 11:16
  • @cbeleites with a reverse mortgage, the bank knows what they're getting. This isn't a trick or some mysterious financial product that somehow, the bank will approve but not understand. – iheanyi Jul 17 '18 at 19:49
  • @iheanyi: Sure. They are almost unknown over here, though. Plus while house prices increase a lot in large cities right now, rural situation is much different and the banks may not be very eager to get a house which won't be easy to sell. And that's where cultural differences become crucial (particularly if OP says the brother considers moving to Europe). (Anyways I meant those comments just to illustrate that there are places where these ideas don't work out easily, nothing more. - I think we're getting off-topic., so I'll stop here) – cbeleites unhappy with SX Jul 17 '18 at 20:59
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After he has already made a budget, is there any way he can take a long term leave work, about 6 months without pay? This will allow him to try to live off of 20k and see if he can stay within his budget. Even if he is able to live of 20k if he is anywhere close to spending that much he will need more because there's a low chance he will hit any long term expenses like home maintenance. This will also give him a chance to see if he would miss having the structure of work, people do, if he would be willing to see if he can work part time that would make things easier.

If he can't do that or is still insistent on retiring now, just make sure his budget really includes everything and talked about it with his fiancée since he wont be able to test it. He needs to be sure he has budgeted in normal living costs: food, healthcare, taxes, childcare, car insurance/maintenance, etc. He also needs to budget for big, less often things like home maintenance (I've seen estimates you should save 1-3% of home value per year, I assume he should have an estimate for his average costs by now though) and car replacement.

It's definitely possible to live off that much but he needs to make sure he can stay within that amount of money since he won't have anymore coming in. To make sure of that he needs a very detailed budget. He also needs to make sure he won't run out at that withdrawal rate because as has been said the 4% rule is supposed to last 30 years. This is a big decision and needs a lot of discussion with his fiancée as well as an in depth budget.

Brythan
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Chris
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    Why do you need to actually leave without pay to determine, if you can stay within your budget? – mastov Jul 12 '18 at 13:48
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    Theres one thing to make a plan and another thing to execute it. I recommend that so he can actually experience not only living on that budget but also living without work. Some people miss the structure and daily social interactions and don't realize it until they retire. If he finds its not going to work out he will still have a high paying job to return to. My current company has procedures for taking long leave so why not try it if its available? – Chris Jul 12 '18 at 13:59
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    There's another thing entirely to encourage someone to waste (up to) 20 grand, actively setting themselves back in their retirement goals. There are ways to figure this out without spending money, especially not in those amounts. – schizoid04 Jul 12 '18 at 14:05
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    Yes there are and if he has already made a budget and still wants to retire whats the harm in doing essentially a trial period which would allow him to return to work if it doenst work out, for any reason? Either way he's planning to not work and spend the money, my suggestion give him an option for if it doesn't work out. As I said money isn't the only reason he might want to continue working. – Chris Jul 12 '18 at 14:19
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    @schizoid04 If he takes a 3-6 month sabbatical, and tries to live on $10-20k, that's not "wasting" money - since he'd have to spend living expenses anyway. The only "waste" is trying to take it unpaid, rather than seeing if the company will give him the sabbatical while setting up a $10-20k bank account to use as his only "easy-access" money for that time. – Chronocidal Jul 12 '18 at 14:33
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    @mastov I agree with you on "why without pay?", but taking leave is certainly an important part of this: When he's not going out to work every day, will his expenses go down (less money on fuel, etc) or up (eating out more, or going out to golf clubs/cinema etc)? – Chronocidal Jul 12 '18 at 14:36
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    Maybe he will also get tired of his hobbies faster than he thinks. Or quite the opposite: publish his first book and become a bestselling author. What a shame if he would have not tried. That's why I like this answer. – daign Jul 12 '18 at 14:37
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    @Chronocidal If taking it with pay is an option then that's obviously a better option. I am unaware of a company that would pay for that long. – Chris Jul 12 '18 at 14:52
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    This answer hints at a sabbatical, and that may be a better option for him to deeply pursue interests and hobbies without negatively affecting long-term future. (a 4 or 6 month sab seems more explainable to me if I were to re-enter the workforce somewhere else). – Shawn Jul 12 '18 at 15:07
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    A sabbatical defiitely sounds like a decent check. Especiall when done under realistic conditions it also may be a wake up call. – TomTom Jul 12 '18 at 16:08
  • @Chronocidal it's pretty obvious why losing $20k is worse in the interests of preparing for your retirement than grossing $75k (6 months, 1/2 of 150k salary), and netting whatever the difference is before taxes and his current spending. If this were a kid asking about whether they should take out a student loan, would you recommend they get themselves into debt now so they know how well they'll be able to afford it later? No: there are simpler, much less convoluted ways of reaching this information, which don't set the subject in worse financial standing than when they were asking. – schizoid04 Jul 12 '18 at 22:55
  • @schizoid04 Agreed, but your wording is messed up: The person would not be wasting $20k, they would be not earning $75k. You need to get your figures on the right sides of the equation! Hence, why I said that the "waste" would be trying to take it unpaid. – Chronocidal Jul 13 '18 at 06:51
  • @Chronocidal I think I see now, fair point. The waste would be the lost income, assuming living expenses are the same. – schizoid04 Jul 13 '18 at 13:50
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    "Why do you need to actually leave without pay to determine, if you can stay within your budget?" because work takes up a lot of ones time and energy, if you don't want to be bored out of your skull you will need to replace that with something. That something may well add substantially to your regular expenditure. – Peter Green Jul 16 '18 at 14:25
  • What you all forget is that $ 40 000 in Europe is actually quite decent (and that's where he plans on going for his retirement). And trying to live with $ 40 K in the US is probably a lot more complicated... – dyesdyes Jul 16 '18 at 15:03
  • "... he will still have a high paying job to return to ..." Please research the difficulties that the 50+ (and in some fields the 40+) unemployed are having in trying to get new jobs. Many are finding it difficult even to get interviews. If they edit their resumes to remove indications of age, then they may get an interview, but then they get quietly rejected once the interviewers meet them in person. People expect that older employees will be more expensive or will require more training or higher salaries, and that's not necessarily true. It's not that simple just to jump back into the job. – shoover Jul 19 '18 at 19:32
  • @shoover Which is why I suggested he take an extended leave/sabbatical (not quit) so he can have his old job back if he decides he wants to or he can tell them he is quitting. – Chris Jul 19 '18 at 22:04
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Since there are so many less than optimistic answers here, I'm going to suggest something different.

With your brother doing his hobbies, if he gets really good at them, like wood working, model building, sculpture, whatever, he might be able to turn that into a decent small time business.

Personally, I'm trying to transition away from a day job to the business I run at night, which is basically using my hobby skills to make and sell things on Etsy. In fact, I'm currently working on buying a larger small business in a similar industry so I can merge with it and do it as my only job. Also, I'm trying to do it on Much less than $1m.

It'll be hard work for me, and your brother if he goes this route, but it's possible. There's a very real and huge difference between work you love and work you do just for a paycheck.

I have a feeling that your brother really hates his job, even if he doesn't explicitly say it, and/or may feel as if that line of work is a dead end.

My dad doesn't understand how I can give up a job that pays as well as it does, and I find it hard to believe I'm doing it, but I've set realistic goals for me to hit before making this plunge and I'm going for it. It sounds as if your brother has made goals and is also going for it, too. Go Him! I wish I was able to hit goals like his.

There's another possibility, one where your brother gets bored after 1-2 years of retirement and goes back to work. It happens.

Really, the worst thing you can do is to fight him on this. It's his life, even if there's a fiance involved, and you need to accept his decisions. He is an adult and has been making decisions for himself for quite a few years as an adult. You just need to accept this as another of his decisions. Fighting him will only make him want to retire more and stay retired, even when he knows it's the wrong decision. He'll want to "prove that he can do it", even in 10 years if his marriage is failing, his car and house are being repossessed, and is on the verge of bankruptcy.

There's also the possibility that he could retire now, sell those books of his, which 1 might become a best seller, and not have to worry about money ever again.

It's way too early to say he will fail or succeed, so just roll with it.

I would, however, avoid loaning him any money. He made his decision and needs to live with it. Of course, if it's life and death, give him some help, but never rub it in his face. Offer suggestions, but also never make ultimatums or try to tell him what he has to do. Those just make a bad situation much worse.

Also: I've lived off less than $40k a year (before taxes) most of my life, and I'm assuming your brother doesn't have the student loans or the credit card debt I had.

And: My best friend takes home about $40k a year and is a singe dad with 3 kids.

It may not be comfortable, but it's doable.

Addendum:
Something I haven't read in other answers is any calculations on how much the OP's brother is currently saving.

I did some quick calculations, and even saving $50k a year, it would take 19 years to save $950k, so this brother is saving much more than that, given the likelihood that he hasn't been saving an equal amount each of those potential 19 years. It would take almost 10 years to save the stated amount by saving $100k a year.

Since the OP stated that the brother expects to retire next year, that's as little as 6 months away as well as $50k away from the goal, so this brother is definitely sacking away the money, instead of spending it.

Of course, this doesn't account for earnings on stocks/bonds, real estate price increases, and probably a host of other possibilities, but this brother seems like he's already a frugal person.

I would hazard to guess that he is already living on $40k to $50k a year. Removing the need to pay for constant transportation to/from work, work clothes, work lunches, and all the other things that cost money and are work related (morning coffee), he probably can get along pretty decently continuing to live at $40k a year.

I remember at least one job I had where I thought I couldn't afford to continue working for that company, since I wasn't getting paid much more than I was spending to remain working at that job, including all the other bills I was paying.

At a position where he's making $150k a year, he might be expected to wear expensive suits, ties, shoes, drive an expensive car, eat at expensive restaurants, etc. Those costs can really add up to massive savings when they are gone.

As an added tip for the brother, even if he's already frugal, is to get a copy of "America's Cheapest Family". I'm in no way connected to the book or getting paid for it's advertising, I'm simply another satisfied customer. I've used the ideas in that book to help me remove debt, stay out of debt, and remain sane.

https://www.amazon.com/Americas-Cheapest-Family-Right-Money/dp/0307339459

The family who wrote the book has 5 kids, bought several houses & cars, sent kids to college, taken family trips, moved across the country, and so many more things on not much more than $40k a year income.

I still say early retirement is doable, it just takes self control and planning to be able to make it happen. Unfortunately, those are two things most people don't have/do/want/can be relied on for, so we just assume that no-one has it.

computercarguy
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  • +1 - well said. Added with the other answerers' risks and drawbacks I think this offers a good answer to the 'is he realistic?' question with some personal perspective. – Tracy Cramer Jul 12 '18 at 22:26
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    "There's also the possibility that he could retire now, sell those books of his, which 1 might become a best seller" The probability of making any decent money as an author, let alone getting a best seller, is incredibly slim. +1 for the rest – Michael Jul 13 '18 at 09:58
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    @Michael: The thing is, with $1 million in investments, you don't have to make decent money. Just making some money, say an average $10K/yr or so, makes the "retirement" much more workable. – jamesqf Jul 13 '18 at 16:58
  • You don't necessarily have to wear suits and drive an expensive car to make $150k/year. Software engineers in hot markets can make that wearing jeans and shirts, maybe even shorts and sandals in California. – stannius Jul 13 '18 at 22:52
  • @stannius: And even take your dog(s) to work :-) – jamesqf Jul 14 '18 at 05:31
  • Actually some sort of software engineers in some markets would consider 150k an insult as a wage. If you manage to be a top AI specialist there was an article about that being the top job - around 1200 experts in the world or so and a million is a negotiation start. – TomTom Jul 15 '18 at 12:49
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    Around where I live, most software engineers make (considerably) less than $100k a year and, yes, some are required to wear suits and ties. The OP didn't specify his brother's job, so I responded with generalities. Pointing out specific reasons my generalities are "wrong" isn't helping answer this question. – computercarguy Jul 16 '18 at 13:15
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I would say your brother is overly optimistic, but not drastically so. Based on historical data, a $1 million portfolio (75% stocks/25% bonds) can sustain $40k annual spending, adjusted for inflation, for 30 years, with about a 95% success rate. Your brother should be planning for 60 years, so he should probably shoot for a 3.5% withdrawal rate instead of the usual 4% for traditional retirement. U.S. stock market valuations are also high right now, which historically correlates to lower returns over the long-term (10+ years), so some would reduce their safe withdrawal rate even further (perhaps 3.25%).

I would recommend having an in-depth discussion with your brother about his plans, while trying to keep an open mind. Is $40k/year spending reasonable, while traveling twice a year, and possibly adding children? Does he have a plan for health care after it is no longer employer-subsidized? Will his asset allocation sustain his withdrawal rate? Is his portfolio too risky (e.g. individual stocks)? Does he have strategies for accessing retirement funds before traditional retirement age, if necessary? Is his fiancée planning to continue working? That would change things considerably. If he needs to go back to work after several years, is he willing to take a relatively low-level job?

Craig W
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He is overly optimistic. Which sucks if you have to live with the results of that for 50 years or more - life expectancy of people with money is going up. Sadly as is health care cost.

I also would challenge him to live on 40k USD per year. See, basic faulty errors: Kids cost money, as will his house. Let's leave the partially ridiculous US property tax out - if you live in a place for 40 years, you will get some major renovations going, which are hard with a budget that is that low AND NOT INCREASING.

To give you a counter idea. I am 50 next year. I figured out that in order to retire, I need: * 5000Eur a month * For 50 years * Which is a flat 3 million. Rather 4.5 to have some leeway.

Which I likely will overshoot significantly - and still not sure I will retire (because I actually love my work), and I rather think of spending 300k on cars for my 50th birthday. But that is another story.

He needs to focus. Sadly his hobbies are all the "well, year, dream on" style that have little chance to earn significant income. He also really needs to think about all the crap that WILL happen in the next 30 years that he is not prepared for.

So, no - he is on a great way. He is significantly ahead of the curve. But no, he is totally not ready to retire.

And he really wants to put his family through living on 40k USD? SERIOUSLY?

Brythan
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TomTom
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    Comments are not for extended discussion; this conversation has been moved to chat. And another answer on MSE has drawn comments that go off the rails. No further comments will be accepted on this answer. Go to chat if you wish to keep bickering. – JTP - Apologise to Monica Jul 12 '18 at 19:03
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Under those circumstances, I would probably work another decade or two. 4% withdrawal rates are based on a study of historical market performance and an expected retirement age of 65.

It sounds like your brother is very conservative with his spending to have saved as much as he has. There's no reason he couldn't get by on a frugal lifestyle, but there is a good possibility that medical expense inflation (not accounted for in the aforementioned study due to medicare eligibility at age 65) would eat away at his planned lifestyle enough that he would have to return to work after a couple of decades when his currently marketable skills are less marketable.

NL - Apologize to Monica
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  • "Another decade or two" is a really wide range. (I do realize there's not a lot in OP's post to go on.) – stannius Jul 13 '18 at 22:53
  • @stannius I guess I could put a specific dollar amount down, but the main factor would be market performance. A decade in a bull market, two with a minor recession. – NL - Apologize to Monica Jul 14 '18 at 00:40
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Half of the US makes (gross) less than $60,000 per year. Many families also have mortgages, car payments, children, etc. and they are making it work. So if his spouse were to contribute to the family budget then they would likely be doing better than half of American households.

The biggest financial concern with not working is healthcare. If his (future) wife has a job that provides benefits, he will be covered. If he has to provide for his own or the whole family's healthcare, $40k/yr is probably unrealistic.

So if he has minimal debt and $1,000,000 cash (real estate can drop, stocks can drop, etc.), then he could make it work just like half of the country is doing right now. If he finds some part time work as a hobby then he's just padding his income.

Lastly, depending on his field, getting a job after a lengthy sabbatical may not be that hard if he decided to go back. Even if he started as an entry level employee, he's still adding to his $40k.

As others have said, the social interactions at work are also part of the equation but many moms and dads stay at home every day and have fulfilling lives. There's no reason he couldn't do the same.

So, to the title question: "should he?" - that's entirely up to him and is completely opinion based.

To your next question, "is he realistic?" - yes, as I said, half of the country right now lives on about that much income.

To your last question, what concerns should you bring up? - healthcare is the biggest one and as others have said, emergencies also play into it. Knock on wood, some children are born or come down with very expensive maladies which could very quickly increase his financial commitments.

Tracy Cramer
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    $1M in cash won't last long, given that treasuries are yielding below 3% even at the long end. Stocks are the way to approach the expectation of the money lasting a half century. – JTP - Apologise to Monica Jul 12 '18 at 19:08
  • @JoeTaxpayer, I agree but if it were my money, and especially with the market where it is now, I would not invest in stocks. I'd probably put it in bonds, gold, maybe collectible currency. @2% in bonds it would last 33 years, 2.5% - 38 years, @3% 45 years, and at 3.5% - 59 years. I might go for an index fund after our next correction/crash. – Tracy Cramer Jul 12 '18 at 19:44
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    Respectfully, 2% return would last 25 years. The initial 40K is not fixed, it gets an inflation adder each year. A low 2% adder to that and after 25 years, the withdrawal is up to over $65K. You want a 3% return on cash? I'd make inflation the more realistic 2.5%, and we're at 27 years. Not the 50 years this guy needs. – JTP - Apologise to Monica Jul 12 '18 at 19:44
  • @JoeTaxpayer, you're right about an inflation adder. I didn't add that since most of my expensive costs are fixed, mortgage, car payment, etc. If I didn't have those, assuming the brother has those paid off, then yes, all items would need to bump for inflation. But if I didn't have any of those fixed costs, living on $40,000 a year would be quite an extravagant lifestyle for me. – Tracy Cramer Jul 12 '18 at 20:15
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    All your points are excellent, but let me point out that expectations are also working against him. If he made $150,000 a year, even if he didn't spend much and and saved most, only having $40k a year to live on is a huge shock. His options for unexpected circumstances are simply much more limited. And it's not much comfort that his living standards are still good by US standards, when he was earning more than double US averages. – SafeFastExpressive Jul 12 '18 at 21:37
  • @RandyHill, I agree it is a difference. But let's break it down. If he has saved and accumulated $950,000 in, say 15 years (22 to 37), that's an average of $63,000 a year. He obviously wasn't making $150,000 out of the gate so for arguments' sake average the last 15 years' pay at $120,000. Take out 15% in taxes and we're at $100,000 take home. Now if we take out the savings of $63k from before, that would mean he's been living on $40,000 for a while now. His return on investment may add a bit, his taxes may subtract a bit, his average may be more or less. I don't see a huge shock. – Tracy Cramer Jul 12 '18 at 22:18
  • @RandyHill, I also agree that the unexpected (emergency) is a risk and mentioned that in my answer. – Tracy Cramer Jul 12 '18 at 22:21
  • @TracyCramer I think we are entirely in agreement on the important issues, just disagreeing on his mental expectations . First I doubt he's living on $40k, whatever he made the last 15 years he's likely now making more. And even if he is living on $40k, there is a huge difference between choosing to and being forced to. Making $150k is not just a lot of money, it's self affirming, a mark of success, providing security, flexibility, and lots of options in how he chooses to live. In retirement making $40k (pre-tax!) he'll have almost no more choices left. – SafeFastExpressive Jul 12 '18 at 23:30
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He has saved over one million USD on a salary of £150,000 per year. He is good with money and understands saving and investment. I'd trust him to live his own life.

If he's wrong then he'll lose money slowly and he can always go back to work.

UEFI
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I give this problem out to students when I teach financial planning. The easy answer is "yes" it can work. Are there sizable risks from what you have posted, "yes."

If it were me, I would do one of three things. The more likely choice for me would be to go to a bank trust department and open up a spendthrift trust. Legally, he would irrevocably be giving the money away without recourse to get at it. This protects him from divorce and him wrecking his car and owing $500,000 in damages.

Spendthrift trusts have to be created with great caution and care because you cannot fix a mistake or a misunderstanding. The bank will do exactly what you wrote in the document, not what you intended the language to mean. The advantage of doing this, turning himself into a trust baby, is that if he were sued he legally owns nothing. Indeed, if he had to go to a nursing home, then he would legally be destitute.

The risk is that the bank may disapprove of his ideas after he signed the document. For example, imagine he decided that he wanted to own an elephant but the bank believed that it would not qualify as a purchase by them under the document and he had no special elephant provisions in the document, then he cannot use those resources to buy an elephant.

For a spendthrift trust, a very very experienced trust attorney is required. If I were him, that is what I would do.

My second choice would be to purchase a straight life annuity with an inflation index. If the annual payment isn't $40,000 then that is a warning that he really may not have saved up enough money. He will also need homeowner's insurance and an umbrella policy to protect the annuity from a lawsuit. The difficulty is that in some states it may be subject to alimony and in all states, it is subject to child support. Nonetheless, if a straight life annuity, which is a conservative financial instrument, won't offer him $40,000 per year indexed to inflation, then he should consider adding more money to his retirement first.

The final choice is to get a homeowner's and an umbrella policy and invest the bulk in carefully chosen equity securities. Dividends tend to keep up with inflation over time and so, unlike real estate or bonds, he should be able to get a constant $40,000 if he is really careful. These funds are subject to alimony, divorce proceedings, and child support. I would never consider this one unless I was already married. If he was already married, then it is a marital asset and cannot be severed. If he is not married, he needs a prenup if he is going this route. All of this is state specific. Different states permit different things.

He should choose the first or second route since he is not married and in fact, he should contact a bank trust department for referrals to attorneys. Being functionally immune to lawsuits when you are never going to work again is a big deal.

Dave Harris
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In my experience, the two most expensive things a person can have in their life are

  • a spouse who doesn't work outside the home,
  • children.

I would strongly suggest that your brother delays his decision about retiring until he has some idea

  • how many children he's likely to be fathering,
  • how many years his wife is likely to take outside of the workforce, in order to help raise those children.

Currently, it's absolutely impossible for him to calculate how much money he's going to need to live on, and to provide for his family. So he certainly shouldn't be considering retirement just yet.

Dawood ibn Kareem
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Yes. It is quite doable, many families are making this amount, combined.

Health care, at 40k, he will be able to get subsidized, especially with kids.

He may also be able to get other tax credits, since his gross income will likely be low.

The big take is real estate taxes. I would look at states that are known for retiring within, say Florida, vs New York or California. Florida also great asset protection laws during bankruptcy. And low cost of living, depending on area.

Is he willing to go on social assistance?

He should work the numbers out, with his tax accountant, or find a qualified CFP for retirement planning.

paulj
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For what it’s worth, $40k/yr was enough for me and my wife to pay our mortgage, maintain a car, put two sons in private school, and still have luxuries like internet, cable TV, and vacations. But that was 25 years ago.

Today, the kids are on their own, the wife has passed, and $25K/yr (social security and pensions) is enough for me (single) to be comfortable roaming the world.

If I choose to “settle down,” there are only a few cities in the world where I would need more than $2500/mo.

If I remarry, there would still be places in almost every country where a couple could get by on that. If she also has income, then remove the “almost.”

WGroleau
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If your brother has managed to save almost a million dollars by the time he is 37, I think it's fair to say that he knows how to manage money. If he has a million dollars and you don't, what makes you think you know more about managing money than he does? :-)

Getting an income of $40,000 per year from a $1 million investment seems reasonable. Stock market averages 7% long term. You'd have to leave something in there to make up for inflation, probably about 2%. So withdrawing 5% should keep a constant balance, 4% and it would probably grow long term. Which means you can continue to withdraw at that rate indefinitely.

Tax on a single person making $150,000 is pretty high. Let's see, a quick and dirty calculations says if he is single, no dependents, takes the standard deduction, etc, his federal taxes might be $32,000. So his present after-tax income is about $118,000.

If he's saved $950,000 in about 17 years of working, assuming he's been getting about a 6% return for the sake of conversation, he'd have to have been saving $37,000 per year. So he's been living on maybe $81,000.

Of course he probably didn't start out making $150,000, so really he's been living on less than that. But that's the ball park, anyway.

As long as he worked for 10 years he'll qualify for social security when he hits retirement age. Not much because he didn't work a full 35 years, but it would add something. Let's see, assuming he worked 17 years for an average income of $100,000, social security will average that out to $49,000 over 35 years, about $4100 per month, benefit = 90% x 895 + 32% x 3205 = $1831 per month if he starts collecting at 67.

So key question is, Can he get along what he considers reasonably comfortably on $40,000 per year? If so, it's a fine plan. Lots of people retire with less. I'm planning to retire on about $50,000 and I consider that adequate.

Jay
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  • This hits the painpoint quite well, with the amount saved and his income it is almost certain that he has been getting used to having 60k+ to spend every year. The only uncertainty here would be if he put a huge amount in the house (say 1m) or started out with a huge debt. – Dennis Jaheruddin Jul 18 '18 at 10:44
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is he realistic?

This is more of opinion based. In short the 1 million looks way too conservative for someone in forties; maybe OK for someone with an age of 60 plus.

If we leave the Growth in Funds and Inflation for a minute;
The funds would last him for 25 years. i.e. at his age of 63 years. This is way less than average life expectancy that is continuously going up around 80 years.

For the retirement fund to last life long; one should factor in a very safe [conservative] rate of return [stock markets can be volatile in short term and wipe out the savings temporarily]; should factor in higher inflation; it should also segregate different items; i.e. daily living one can use the consumer price inflation as an indicator; however health care inflation is huge in most countries.

If they are planning to have kids, the lifestyle costs will shoot up and he will run out of money sooner.

In the 1 million, if he has counted the house he is living in; it is incorrect.

JTP - Apologise to Monica
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Dheer
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    Neglecting investment returns and inflation gives pretty much a meaningless estimate because those factors have an overwhelming effect over 40-50 years. – nanoman Jul 12 '18 at 04:39
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    Health care inflation for consumers is zero or controlled by law in most western countries, because they have universal provision of health care. Health care is only likely to be an issue if he’s in the US. – Mike Scott Jul 12 '18 at 05:15
  • @nanoman Yes it is meaningless and even with that assumption the funds don't last as they should. So the person has made an implicit happy scenario assumption that is incorrect. – Dheer Jul 12 '18 at 05:39
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    @MikeScott Although, annoyingly, the OP doesn't say so, their use of dollar-amounts, and their explicit mention of healthcare (plus the demographics of this site) make the OP's brother being in the US more likely than not. – TripeHound Jul 12 '18 at 07:49
  • I don't think it is opinion based - the numbers do not reliably work out, and with a retirement of likely 50-60 years, they better do work out extremely solid. Because in this timeframe some stuff is very likely to happen and his numbers do not allow for reserves here. – TomTom Jul 12 '18 at 08:45
  • Average life expectancy in the US has dropped for the past two years after increasing for more than two decades. In those two decades, the life expectancy of wealthy Americans increased about 5 years but not at all for the poor. The million dollar brother better make sure his financial projections are solid (they're not). – Bob Baerker Jul 12 '18 at 12:00
  • @Dheer You are saying you have done an upper estimate of the time his funds will last? That's fine, but that only justifies leaving out inflation (which shortens the time the funds will last), not growth by investing (which prolongs the lasting of the funds). – mastov Jul 12 '18 at 12:29
  • Also please do not take average life expectancy - when more and more people have drug addictions or a very unhealthy life style. That number is scewed and if you are not poor and have a decent healthy life.... you can expect significantly better. – TomTom Jul 12 '18 at 12:34
  • @mastov I am trying to point out the parameters OP is using to estimate is inaccurate. There needs to be more consideration to determine if the funds are adequate or not. – Dheer Jul 12 '18 at 12:34
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    @MikeScott Inflation in health care costs is running ahead of general inflation everywhere. Those costs have to be paid somehow. In the UK that means general taxation is going to have to rise; in places like Germany and Switzerland, I expect that to mean that insurance rates will rise. – Martin Bonner supports Monica Jul 12 '18 at 12:50
  • The average annual health insurance premium in 2017 (US) was $6,690 for single coverage and $18,764 for family coverage. The average family premium increased 55% since 2007 and 19% since 2012. The future wife really needs to have a job with decent health insurance otherwise this is another $40k budget buster. – Bob Baerker Jul 12 '18 at 15:18
  • @MikeScott: Martin Bonner is spot on. In Germany, the "governmental plan" health insurance fees have increased from 12.5% of income 1990 -> 18,3% of income 2018. That's 46 % increase on top of inflation (more precisely: increase in wages), or anually 2.1 % on top of inflation. To give some absolute numbers: the minimum health + care insurance fee for someone without employment contract in the "governmental plan" in Germany is ­­≈5.6 kUS$/a for a single person. For 40 kUS$/a income, that's currently 7.1 kUS$/a. Private insurance would be cheaper while young, but then increases steeply... – cbeleites unhappy with SX Jul 17 '18 at 12:06
  • ... so the current recommendation is that someone who goes for private health insurance at age 30 should save 200 €/month to buffer the increases with age. Current prediction is that 30 yo will pay about 3x the fees when he is 65. – cbeleites unhappy with SX Jul 17 '18 at 12:08
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I'm really concerned that if your bro-ionnaire follows through on his "plan" he's going to end up flat broke in 5-10 years. Here's why:

  1. To quote a friend of mine who got $1M back in the late 80's when he sold his company, "A million dollars doesn't go as far as you think".
  2. He's going to find that "plan" tough to follow. That 40K-per-annum for a relatively young guy with a house, a wife (assuming he gets married), and kids won't go nearly as far as he thinks. Especially if/when kids show up. That house is going to need maintenance, too. Furnaces quit, A/C's die, new fridge, new microwave, replace this, fix that, tune that piano - it adds up. Hoo-boy, does it EVER add up!
  3. Is fiance'/wife going to quit her job too? Jealousy will rear its ugly head in a big, fat hurry if she doesn't, and especially if she's pulling in more money than he is.
  4. He likes to travel? He'd better get over that in a hurry if he plans on not touching his principal. Oh, but just a little won't hurt, right? Wrong.
  5. Everybody - family, friends, neighbors, the postman, etc - is going to be hitting him up for money. Or with a sure-fire can't-miss "opportunity". Or...you get the picture. Mom needs a nice present for Mother's Day? CALL THE BRO-IONNAIRE! Dad wants that hot car he's always DREAMED of? Hey, Bro-ionnaire! I hope he's really good at saying, "No", and dealing with pissed off people. If not...

IMO he's got 5-10 years before he's back at the grind, and probably at a lower salary, maybe with an ex-wife, alimony to pay, child support to pay, and etc. In my opinion your bro-ionnaire would be a LOT better off if he keeps working, keeps socking it away, and maybe takes a bit more vacation than in the past. But it's his life, his money, and his problems. Thankfully... :-)

Bob Jarvis - Слава Україні
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I think your question - and most of the answers addressing it - misses the point.

Is he realistic? In what? Yes, there's a good chance that the million dollars might not last him until he dies.

But that's not the issue at all. It's an issue of personal preferences. Actually listen to the quotes he's telling you. It's telling the story of a person who wants to not spend their young years toiling at a job. Sure, that's not the choice I'd make - or most of the people here, for that matter - but if your brother weighs:

  • Getting to do what he loves in the prime of his life

    vs

  • Working a job he doesn't like for 10 more years so he can have a more stable retirement

... and chooses the first? As long as he has all the relevant info, you can't force him to have the same priorities.

(If it helps, consider this: it's not nearly as doom-and-gloom as you might think. Okay, let's say the million isn't going to last long enough. From what I gather, he's good at math and aware enough of finances to know things aren't going to plan if that happens. So he'll likely come up with a new plan. It's not like he's suddenly going to wake up and have $0. He'll say, "Shoot - I'm down to $800k and at this rate I'll be out of money in 18 years. Okay, maybe I need to find a part time job to supplement the income.")

Kevin
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A million bucks is peanuts.

He is living in a dream.

He's not even in the ballpark.

Of course, naturally, he could go live somewhere in the world that is incredibly cheap.

But that is totally miserable - those places are cheap for a reason.

I've (been very fortunate to) have a number of periods in my life where I did absolutely nothing for some years. He could consider that approach.

Tell him to do absolutely nothing, nada, for 24 months starting tomorrow.

I strongly recommend it.

Someone suggested a guideline to me - every time you have a product or whatever that gets you a million in the bank - do nothing for four years.

"A million == 4 years break."

(Assuming you're a normal person with children, telephones etc. Sure, be a loner in hut in a cheap country and you can live for a very long time - 20, 30 years - off a million bucks. That's an option.)

One point

"$950,000 in the bank (including stocks, real state and bonds)"

The phrase "in the bank" means you literally have cash money in a checking bank balance.

"stocks, real state and bonds" are a fantasy, it's saying you may have something. It's the exact opposite of the phrase "in the bank". The phrase "in the bank" very explicitly means not including real state and bonds, and gambles like stock.

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Fattie
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    It is especially fantastic counting all your real estate which you can't bank without losing the place you presumably live in. – mathreadler Jul 12 '18 at 17:09
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    People have this idea that $1M is a lot of money I suspect because our idea of the millionaire lifestyle come from the 1920s when the purchasing power of money was 10x to 15x times larger. When I was a teenager an older family friend who is a stockbroker told me that when I got to be his age, I'd need to be worth $10M to have a secure retirement, and I thought he was crazy, but he's absolutely right. (And 30 years later, I don't have that $10M!) – Eric Lippert Jul 12 '18 at 19:23
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    Quite, it's a "cartoon prop" . . . "A million dollars". Unfortunately the monthly cash costs of living, have stupendously increased over the last 50 years. Items that were nonexistent or cost pennies, are now incredibly expensive per annum. – Fattie Jul 12 '18 at 19:26
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    Right now, 1 million USD allows some great living standards in Brazil, partially because the exchange rate is favorable to the US dollar, but mostly because real interest rates are pretty high over here. So picking a good city where life quality is good, but costs are not astronomical (i.e. Stay away from São Paulo or Rio de Janeiro) and He'd be fine. I'm sure there are other places that fall nicely into such description. – Mefitico Jul 12 '18 at 21:23
  • The median American family income is about $50,000. The OP says his brother plans to live on $40,000. If you consider that unbearable poverty, okay, good for you, but to most Americans that's a decent income. Yes, having $1 million today doesn't mean you can live in luxury for the rest of your life. But it can support a roughly average American life. – Jay Jul 19 '18 at 05:10
  • RE "in the bank" People routinely use the phrase "in the bank" to refer to stocks and bonds as well as savings accounts. Many banks offer investment accounts so it's not necessarily inaccurate. Even if you want to quibble over the terminology, the OP clearly said stocks, bonds, and real estate, so he doesn't mean money in a savings account paying some tiny fraction of 1% interest. Also, as I read the post, he is not including the value of the brother's home in the $1 million. He presumably means other real estate holdings. – Jay Jul 19 '18 at 05:14
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If he really had the entire 1 million in stocks and owned his house outright, it would work, but only just barely.

It is said that stocks yield 4.5% after inflation adjustment over the long term. I'm not sure how accurate that is but my own data puts it between 3% and 6% so let's take it as good. Therefore, he could draw an income of $45,000 forever. He wants to live on $40,000. So far, so good. The way the numbers work out, > 30 years is approximately forever in this kind of feedback.

Problem: He included his house in that number. Don't do that. Houses don't yield 4.5% profit. Houses lose money unless you sell them. There's not enough information in the question, but if I project typical house values I find it won't work anymore.

But raising a family on $40,000 a year from investments and no income is something I would not try. The health care costs simply won't allow it.

Joshua
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    Houses don't really lose money, especially if you consider that you need some place to live either way. Agree that if it's included in the million, that makes the situation even riskier. – stannius Jul 13 '18 at 22:55
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    @stannius housing is an expense. Either you pay taxes and maintenance expenses on property you own (notwithstanding any loan on the property) or you pay rent and owning the home is likely to be less expensive than renting over a long period, but either way it's an expense. Apart from costing you money your outright-owned home isn't kicking off an annual dividend that you can spend, it might appreciate in value and that is useless to you unless you sell it. It is for that reason that home value should not be included in the number when considering retirement needs. – quid Jul 16 '18 at 02:08
  • @quid The value / equity of the house doesn't count for much directly (unless you plan to monetize it e.g. by selling it and moving to a cheaper area), and it's not quite "free" as you note. But at the same time, you can't just ignore the value of the avoided costs, i.e. the difference between the rent you would have had to pay and the lower carrying costs of a mortgage-free home. Perhaps the easiest way to account for it would be to figure out how it affects your expenses, and make sure that's covered in the (in OP's example) $40k number, and then not included in the $1 million assets number. – stannius Jul 16 '18 at 17:08
  • When you're cutting it as close as the OP's Bro, you can't afford to just handwave away assets as "housing is an expense." You have to account for everything carefully. – stannius Jul 16 '18 at 17:09
  • @stannius: I would have gone on but raising kids put kabosh all the same. – Joshua Jul 16 '18 at 17:16
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    @stannius I agree that the person asking the question should make an attempt at accounting for everything carefully and has not. But the issue we have no idea how much of the $950k is house or if there's a loan, maybe he moves to a house that's "only" $300k, now you're drawing down $40k /year against $650k and the math changes. The issue is you can't draw down on real estate the way you can more liquid assets it's for that reason that you exclude real estate value from your draw down calculations. Owning the house just affords you the lower future expected housing costs. – quid Jul 16 '18 at 17:17
  • America’s ACA will provide quality affordable healthcare to someone making 40k, especially with a family. Assets are not counted in eligibility determination (though they need to be reported anyways.) – LN6595 Feb 21 '19 at 18:11
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So many missing variables (e.g. what country is this, and what currency, is there any retirement funds included etc ...) but it heavily depends if OP brother is ready to completely change his lifestyle. If he is planning to live very frugally, that of course it's completely doable. However, what about his (future) wife, is she on board? Is she also going to retire and live a frugal lifestyle? And what about kids.

Some people mentions health care costs, which is especially relevant if living in USA since the country has close to zero universal health care, so if OP brother is in USA then that's a huge factor.

And while making 150k/year is pretty nice, it's still a very far cry from having FU type of money. And while having a million dollars networth is nice, again it'd be very hard to live off it if most of that networth is tied to real estate (and if so are they going to downgrade their house)?

AnthonyWC
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Western Europe is a BIG place

A million dollars would go VERY far in Portugal.... But would get you no where in Paris or London...

and 37 is young... if he lives to a hundred, can he really make that million last for 2 people for 63 years?

And i think it is a safe bet that he is not planning on having kids?

sofa general
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