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Assume that I need $15,000 (USD) per year to cover all my costs including health insurance. How much money do I need to retire?

The naive approach would be something like this: An ETF gives, on average, maybe something like 6%, so I would need 15,000/0.06 = $250,000. But this might be too naive since it only considers the average case. Would I be able to recover, if, for example, in the first five years the ETF loses money?

So what I rather need to know is something like the respective quantiles: How much money do I need, such that with a 99% probability I will be able to take out $15,000 per year for the rest of my life? If it matters much, assume that I am 35.

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    A few calculations here (the 4% rule is mentioned towards the end) : money.stackexchange.com/a/94307/11768
    – Chris Degnen
    Feb 11, 2021 at 22:55
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    Assuming that the total market crash within your lifespan is more than 1% like, no money on the world would give you 99% probability, you should look for stable and infinite money source like retirement benefits from at least 2 rock solid economies (eg. Switzerland + Norway).
    – 9ilsdx 9rvj 0lo
    Feb 12, 2021 at 12:00
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    It seems that a lot of answers are about retiring at 60, I read the question as being "how much do I need to retire right now?". It may be worth clarifying the question one way or the other.
    – Dan
    Feb 12, 2021 at 15:16
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    Remember, you may need $15,000 in the first year of your retirement, but that figure will increase every year with inflation. You need to allow for an increase of at least 2% per year, and 3% would be safer.
    – Mike Scott
    Feb 12, 2021 at 19:56
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    Nothing you do is going to give you a 99% probability of being secure for 50 years. There have only been twenty 50-year periods since 1000 AD. Think of the worst thing that has happened in your part of the world since 1000 AD. The probability of something that bad happening during the next 50 years is about 5%, based on historical data -- which is the only thing we can use as a basis for estimating probabilities. Massacre at Béziers. Khmer Rouge. Hyperinflation. Smallpox arriving in the Americas.
    – user13722
    Feb 14, 2021 at 18:14

5 Answers 5

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You can use firecalc (https://www.firecalc.com/) to show the historical probabilities that your stock investments will never run out of money when you take out money each year. For 15.000, a stock portfolio of 460.000 would be historically 99% safe for a 50 year timespan. In a best case scenario with that sum, your portfolio would have grown to 9,2 million. A portfolio of 400.000 would succeed in 87% of all historical cases.

Changing the years up won't radically change this percentage anymore after a certain timespan. As a matter of fact, you could likely predict whether your portfolio survives in the first 10 years of retirement and adjust accordingly.

Just keep in mind that past performance does not and cannot predict future returns.

Edit:

To elaborate: The inbuilt-assumptions of FireCalc are inflation adjusted, so the 15.000 would track CPI-inflation to preserve spending power. The tested portfolio consist of 75% stock index and 25% bond funds, with a 0.18% fee to the fund.

And 99% is likely much more safety than you will need, unless you figure the next 50 years will include events worse than the Great Depression and 2 World Wars. On average, your portfolio would have still grown to 2,5 Million while taking out 15.000 during these times.

Use the 4% rule (95% chance of success in 30 years according to the Trinity Study)as a rough yardstick and adjust with better data from FireCalc and other tools.

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    Just a follow up that the percent of times that your strategy succeeds is dependent on you always taking out 4% no matter what the market is doing. If you have some flexibility and can afford to take out less in years when the market is tanking and offset that by taking out more in years that the market is doing well you'd see an increase in the rate of your savings successfully lasting you 30+ years. This may not apply to you personally since 15K is a very low amount to live on already, but for other retirees who have more wiggle room in their budget it can improve your success rate.
    – Dugan
    Feb 12, 2021 at 16:59
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    Also, this assumes a "hard retirement". If you're more flexible and okay going back to work for a couple years if the market is experiencing a major crash then you again have a much better chance of retiring off of a smaller amount.
    – Dugan
    Feb 12, 2021 at 17:01
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    Note that the 99% safety is based on US only data. If you also throw in say Japan, UK, France and Germany in the mix you won't get 99% safety with any amount because there were complete wipe-outs in between. So the 99% amount is probably decent but you should expect it to give less than 99% safety for the future, not more.
    – quarague
    Feb 14, 2021 at 10:21
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    Note that firecalc uses the stock market of a 2nd tier world power who over the last 100 years became a superpower and was the sole industrial power to emerge unscathed from two world wars, gathering scientific and engineering refugees from the entire world. Past results may not indicate future returns.
    – Yakk
    Feb 15, 2021 at 2:08
  • Perhaps a dooms-day-er, but looks at movement.capital/the-hidden-risk-fire-investors-miss. 4% only works for a couple of the world richest countries. IMO, the 4% rule is only supported by nationalism. Might want to be a bit more conservative
    – user32205
    Feb 15, 2021 at 3:54
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Generally, it is recommended to use 4% initial withdrawal. That gives you a 99% chance to make it through 30 years, using up the capital in the process. So unless you plan to die in 30 years, that's too thin.
The 4% rule gives you however a nearly as good chance to still have the capital or even more, so if you're fine with maybe 98.5%, it could work - nobody knows if the financial market future will really look similar to the past.

I'd like to know how you pay health insurance from that amount? Which country are you in? For these amounts, in the US you can only afford a 'go-to-church-and-pray-for-the-best' type insurance. Note also that health care cost overall is expected to increase faster than inflation, and in addition increases with age, so you'll get a double dip in increased cost.
You might want to plan for 3.5% or even 3% to be more secured.

Otherwise, your calculation is correctly executed.

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    @jamesqf , OP writes he is 35. Way to go till Medicare.
    – Aganju
    Feb 12, 2021 at 1:23
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    I can barely pay property taxes with that amount.
    – shoover
    Feb 12, 2021 at 3:29
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    In most developed countries you can "afford" healthcare just by being a human being and living there, at least for now. In a previous question OP talks about buying a house in central Europe.
    – fqq
    Feb 12, 2021 at 13:11
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    @fqq: that depends on the definition of "afford". Most countries do not cover dental care, and not all health services are free. So, while heavily covered, spending thousands of dollars per year on healthcare is not unusual, in particular at retirement age.
    – Martin Argerami
    Feb 13, 2021 at 4:07
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    There is no "free healthcare" in Europe. Someone is paying it, and it is mostly the working population who is paying for young and old people. But nonetheless, at least here in Germany, there is no year long waiting list for any normal treatment and nothing is rationed. The only medical treatment this applies is organ transplantation which does not have an affordability but an availability issue. We also usually have a not so bad general pension, so an additional 15 000€ seems quite sufficient to close the gap between income and pension.
    – Manziel
    Feb 13, 2021 at 15:13
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This suggestion will probably engender some hisses and downvotes but a variable annuity would do the trick.

I don't know what current guaranteed deferred rates are (I've had one as high as 10% simple) but about $100k in one with a 6% deferred growth benefit would grow to $250k in 25 years (age 60), at which time you could withdraw 6% or $15k a year until the day you die.

On the growth side, the $100k would be invested in the market (sub accounts). If it grew at a higher rate than the guaranteed 6% deferred side, you'd end up with a larger pool of money ( > $250k) from which to draw on at age 60 and you'd get more than $15k per year until you die (6% of that larger amount). If you did not live many years past age 60, your estate would get this larger amount less any withdrawals made.

Understand that due to high annuity commissions, you'd do a lot better in the market if the market rose more than 6% a year but you wouldn't have the guaranteed payments for life that the annuity would provide.

Given what $15k pays for now (in the U.S) and what it will be able to pay for in 30 years or more, I wonder how you will be able to survive on $15k in future dollars unless you live in a 3rd world country.

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    Neither a hiss, nor DV. Just my disdain for VAs. The 6%. You should note that this means giving up your principal. Do you believe that at 35, the market won't exceed the 6% growth the VA promises? And, isn't this 'putting all your eggs in one basket'? The same events that would wipe out the stock market in a long term disaster aren't going to spare these insurance companies.
    – JTP - Apologise to Monica ♦
    Feb 12, 2021 at 12:16
  • You only lose your principal if you annuitize and you wouldn't until the assets are spent down. You can withdraw (penalty free) an amount equal to the the 6% deferred side (GRIP, GRUB, etc.) with remaining still in the market. You give up your principal only if you annuitize which one would not do until the assets are spent down. With an allowable annual withdrawal rate equal to the the deferred side (GRIP, GRUB, etc.), you're spending down your asset base. The asset balance goes to your estate if you die. If your sub account growth exceeds the 6% deferred, payout is larger.
    – Bob Baerker
    Feb 12, 2021 at 14:00
  • Got it. Yes. As with any financial product there is a group that this might be appropriate for.
    – JTP - Apologise to Monica ♦
    Feb 12, 2021 at 14:29
  • And yes, a long term disaster could wipe out an insurance company so smaller policies at different companies would be wise, say $10-20k each. The trade off with a VA is opportunity cost (higher commissions) versus guaranteed benefit. FWIW, I have an old annuity which is no longer offered that pays 3% on the cash I parked there. 3% isn't anything worth bragging about but it sure beats 50-60 basis points currently offered in so called high yield money market accounts. Just my opinion but 6% guaranteed isn't terribly bad considering that the long term return of the S&P500 isn't much higher.
    – Bob Baerker
    Feb 12, 2021 at 14:49
  • @BobBaerker the long term return of the S&P500 is 10% per year. Accounting for inflation, you're looking at 3% guaranteed growth through your VA, vs 7% average growth by investing in the market. That translates to $1.08M in 25 years using your same example. Pretty insane in my opinion, and I'd only recommend VAs to those who are extremely risk averse or looking at a shorter timeline.
    – NoseKnowsAll
    Feb 12, 2021 at 23:41
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I've created future-fortune.com just for that, which is a very basic investment calculator which aims to vastly simplify planning for retirement.

How much money you need is only one part out of three:

  1. 📈 Projected yearly return rate
  2. 🛍️ Monthly withdrawal sum
  3. 💰 How much money you have

They are all equally important aspects.

The first one, Projected yearly return rate is dictated by your investing skills (luck).
Some make 4-6%, some 10% some 20% or above. This is a skill you should constantly work on.

The second one, Monthly withdrawal sum is dictated by your living standards. you can live with your parents, forever, eat their food, pay no bills and basically have almost zero expenses, or you can own a house, 3 children and a mortgage...your life choices are up to you. This should be lowered to the minimum possible that will not harm your levels of happiness drastically.

The third, How much money you have is your starting point, it can be money from work, inheritance, whatever. You can retire but still "work" a few hours here and there, or you choose never to work again, living off your investments portfolio.

I suggest: finding the highest paying job you can and stick to it until you can no longer stand it, or earned "enough".

Hone your investments skills, but do not be lured into "gambling"-style investments such as bitcoin or stock options. Stick to what's safe. Slowly gathering gains is what I advise. keep the greediness as low as you can.

Lastly, try to never buy anything without asking yourself "do I really really need this?"

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If you have a monthly budget, push it forward 30 years based on estimated inflation, adjusting for things like a paid-off mortgage, health insurance costs growing much faster than inflation, not contributing to 401(k)/IRA anymore, SS income (or lack thereof), etc. That'll give you a very rough estimate of how much you need each month in retirement. (Update it every couple of years, since "life happens".)

Then push forward your investments, and 401(k)/IRA contributions at the growth rate of your choice.

Lastly, compare the two numbers...

But not really lastly, because spreadsheets are so flexible at letting you adjust the yearly draw-down for inflation, retiring at different ages, deciding whether your investments will grow slower during retirement, etc, etc, etc.

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