Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.
Question: I’m married with two children and am thinking of retiring when I’m 58. I have a portfolio with a value of about $2 million. My home is worth $500,000. I won’t receive a pension, but I’ll get Social Security in my 60s. Can I realistically retire at 58 and maintain my present lifestyle — which requires about $150,000 a year — without touching the $2 million principal?
Ric: Initially the answer would appear to be no. You have to plan to live another four decades. If you need $150,000 a year, the rate of withdrawal from your investments would have to be 7.5% a year, which is not sustainable for that long. And because of inflation, in 20 to 25 years you might need $300,000 to equal the purchasing power of $150,000 today.
But the prognosis isn’t as scary as it may seem. Just because a 7.5% withdrawal rate isn’t sustainable doesn’t mean your retirement idea is a failure or that you’re financially at risk. You’re probably closer to your goal than you think.
You began with the premise that you don’t want to touch the $2 million principal. Every retiree says that. It seems to have become the 11th Commandment: “Thou shalt not touch principal.” But that’s unrealistic and unnecessary. The reason you worked so hard to accumulate this money is to let it provide for you at some point. So it’s OK to spend it on yourself.
Let’s instead analyze it from the standpoint that you’re willing to allow the $2 million to be spent over the course of your lifetime. Can we generate $150,000 a year in that scenario, adjusted for inflation? We can’t do the math in 30 seconds [on the radio] for a reply here, but I’d say the odds are high the answer would be yes, you’d probably be OK.
With more analysis, we can be definitive. We might find that, instead of retiring at 58, you might need to work until 60 or 62. If you’ve been earning $150,000 a year, your Social Security benefits will be more than $2,000 a month, not counting your wife’s benefits. That brings you even closer to your goal.
Next, even if we discover you must work an extra couple of years, that doesn’t necessarily mean full-time employment. It might mean working part-time, earning just $20,000 or $30,000 for a few years.
And that’s not all. You assume you’ll spend $150,000 a year (in present dollars) for the rest of your life. But I seriously doubt you’ll spend at age 90 as much as you do at 58. Thus, you probably don’t need to sustain such a high level of income for as long as you thought.
Finally, we haven’t considered the value of your home and how much it might appreciate over the years. (People often don’t consider the fact that the value of their homes is an asset that can help them enjoy their retirement lifestyle.) The house might not grow as fast as other assets (real estate usually doesn’t), it may not grow at all, but even if it didn’t and instead remained at $500,000, it represents another large asset that can generate income for you.
Thus you are probably in far better shape than you think. I say probably because to be certain you need to discuss everything with a financial advisor, who can examine the money you have, how much you need to spend, when you need to spend it, how long you will need to continue spending it, your goals and your risk tolerance. Once you do that, you’ll have the definitive answer to your question.