The 4% Rule and Retirement: To Leave Money Behind or Not?
The various retirement forums on Reddit are so full of people bragging about their money to a bunch of strangers that I’m never sure who to take seriously. But this post caught my eye because it raised so many intriguing questions: “I plan to retire at 65, and should have about $2 million in retirement accounts … Personally, I’ll view it as a tremendous failure if I die with money in the bank.”
The 4% Rule and Leaving an Estate
The poster nominally wanted to know if he should follow the so-called “4% rule” if he didn’t want to leave an estate behind. The 4% rule is the idea that if you withdraw 4% of your savings in your first year of retirement, and just adjust it upward each year to reflect official inflation, your money will almost certainly last your lifetime. It was first promulgated by financial adviser Bill Bengen back in the 1990s.
Not Worrying About Leaving Money Behind
In this instance, the poster explained why he didn’t want to worry about a bequest: “I’m single (twice divorced) and can’t imagine ever getting married again,” the poster said. “I have no children and never will. In short, I have no one I wish to leave any inheritance too [sic].”
Considering the Amount of Money
But with the amount of money this guy has, I’m not even sure why he’s bothering too much with the 4% rule or, for that matter, the issue of leaving money behind. Unless he’s got very expensive tastes, he’s going to be hard pressed to spend up to his savings anyway. He says he owns his home outright, worth about $850,000 with no mortgage. He’s expecting $3,500 a month in Social Security. And then there’s that $2 million pile.
The Solution: Immediate Annuities
If you’re not worried about leaving any money behind, the simplest solution is an immediate annuity — an insurance contract which converts a pile of money into a pension, by providing you with a guaranteed stream of income for life. Immediate annuities (not to be confused with “variable annuities”) in general are a good part of a retiree’s portfolio, as they effectively help insure against outliving your money. Economists, even without prompting from the insurance industry, have tended to argue that more retirees should own them.
Buying Annuities in the Current Market
And this is a comparatively very good time to buy annuities — at least better than in recent years — because the annuity market is tied to the bond market. Bonds are a much better deal now than they were not long ago, and therefore annuities are too. (Whether they get an even better deal in due course is another matter. Nobody knows.)
Calculating the Income
According to ImmediateAnnuities.com, a man of 65 with $2 million can buy a lifetime annuity right now paying a thumping $12,740 a month. Combine that with the poster’s expected Social Security, and he’s looking at an income of more than $16,000 a month, or just under $200,000 a year. Or, the same person could use that $2 million to buy an annuity that starts out paying less per month but includes some inflation protection. So you can, say, lock in an income of $10,200 a month plus a guaranteed 2% annual increase each year. Throw in Social Security and you’re looking at $13,700 a month, or $164,000 a year, and you’re basically safe from inflation unless the Fed can’t get it down to 2% or lower.
Living a Lavish Retirement
Either way, that is going to pay for a really lavish retirement. OK, so you can’t move full time into the Gritti Palace in Venice, or The Breakers in Palm Beach, Fla., but you could — for example — pretty much cruise the world full time (Cunard’s new Queen Anne ship, based on single occupancy in a stateroom with an ocean view, will cost the equivalent of $340 a night for its first round-the-world voyage, or about $124,000 a year). Whether you’d want to is another matter. There again, if you were doing that you could also sell your home, throw another $850,000 into annuities and live like a king. (Of course, when you returned to land you’d need a new place to live.)