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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75617  
Subject: Re: ScaryStuff on Long-term Care Date: 3/3/2004 10:04 AM
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Of primary concern is this arbitrary requirement for $80,000/ year?

In my opinion also, this requirement seems a little high, but not as high as you think. According to my calculations, the effective tax rate on $80K is 14%, which would leave you with 68,800 after-tax. I am applying an ordinary income tax rate because most people will be retiring on their 401K proceeds, which are taxable as ordinary income. In addition, if you retire before you are eligible for Medicare, your medical insurance costs will probably be somewhere in the area of $1000/month. That's $12,000 a year, and most likely would not include dental, optical, co-payments, or prescription drugs. Even if you're eligible for Medicare, you have to pay a premium for it, and it also doesn't include most of the items mentioned above. In my retirement plan, I'm expecting to average $750/month (today's dollars) in medical expenses, even with Medicare (and I don't have any serious medical problems).

My wife and I (and our 3 children) live comfortably on slightly more than $50,000 right now...When the children move out in a few years our requirements go down even more.

After deducting the $12,000 medical premiums from the $68,800, one is left with $56,800--just a bit more than you're living on--suddenly the $80,000/year isn't quite as high as you originally thought. Keep in mind that this also doesn't include premiums for long-term care insurance, which one might need if you have $2 million to protect, nor the dental, optical, co-payments or prescription drug expenses mentioned above. I think the additional medical expenses would more than make up for any savings you'd have when your children move out.

Currently I am 34 and if there were 2M in my investment accounts I would retire today

At your age, the 2M would then have to last you about 60 years. To generate $50K PRE-tax, one would need just over 1M at a 4% rate of return (6% minus 2% inflation), and the 1M would be totally depleted in 40 years. If one wanted to generate $75K PRE-tax, the amount needed at the same rate of return and years of depletion would be $1.5M. In order for it to last 60 years, you'd need much more. I still stand by my opinion that you'd hardly be able to squeak by, and that's assuming that everything goes well.

Three Trinity University professors -- Philip Cooley, Carl Hubbard, and Daniel Walz -- examined this issue by looking at historical annual returns for stocks and bonds from 1926 through 1995. Not surprisingly, their study revealed that withdrawal periods longer than 15 years dramatically reduced the probability of success at withdrawal rates exceeding 5%. They also concluded that:
1. Younger retirees who anticipate longer payout periods should plan on lower withdrawal rates.
2. Owning bonds decreases the likelihood of going broke for lower to midlevel withdrawal rates, but most retirees would benefit with at least a 50% allocation to stocks.
3. Retirees who desire inflation-adjusted withdrawals must accept a substantially reduced withdrawal rate from the initial portfolio.
4. Withdrawing 4% or less from a stock-dominated portfolio is probably too conservative.
5. For payout periods of 15 years or less, a withdrawal rate of 8% to 9% from a stock-dominated portfolio appears sustainable.


2old
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