Supplement Your Nest Egg with Sweat

Reducing the Cost of Medical Care

Over the holidays, I ran across a nice article by Philip Brewer over at Wisebread. In it, he talked about how much you’ll need for retirement in the context of safe withdrawal rates, using the 4% rule as an example.

In other words, if you assume that you can safely withdraw 4%/year from your retirement portfolio, then you’ll need $1M to provide $40k/year in living expenses. While the exact “safe withdrawal rate” has been debated ad nauseum, that’s somewhat beside the point for our purposes, so let’s not get hung up on the specific number.

Instead, I want to highlight a very important point that Philip made:

“The calculation also works in reverse.”

That’s right. This calculation also works in reverse. So if have anticipate having living expenses in retirement of, say, $50k/year, you’ll a retirement nest egg of $1.25M ($50k is 4% of $1.25M). That’s a whole lotta scratch, and it might be somewhat daunting to be staring down the barrel of that number.

Let’s say you’ve saved and saved and saved, but you’re still short of the goal with $1.1M — a full $150k short of where you need to be. The good news is that you can fill that gap in your portfolio by earning $6k/year through whatever means you have at your disposal.

Whereas $150k might be a large, imposing number, $6k/year doesn’t sound nearly as bad, does it?

Looked at another way, if you’re willing to cut $6k/year off your living expenses, and make do with $44k instead of $50k, you can stop saving and start enjoying your retirement that much earlier — i.e., once your nest egg hits $1.1M vs. $1.25M.

Of course, this is all highly sensitive to your assumptions. Maybe you need more or less, or maybe you’re comfortable with a higher (be careful!) or lower withdrawal rate. Those details will vary from person to person. But the general principles outlined above hold true for all of us.

As Philip puts it, capital substitutes for labor — and vice versa. That is, with a big nest egg on your side, you can stop working and let your investment provide for you. Or if your nest egg isn’t quite big enough, you can supplement it with a bit of sweat.

6 Responses to “Supplement Your Nest Egg with Sweat”

  1. Anonymous

    Using the context of the statements that $40,000 per year you need $1,000,000 in your nest egg.
    That uses a multiplier of 25 to figure things out.
    $50,000 being a yearly retirement expense you can also do the following if you are married and want to figure what your entire nestegg looks like using both SS, Pension and Nestegg.
    I will use my example and situation
    My SS = $1800/mo x 12 = $21,600 yr
    Wife SS = $1200/mo x 12 = $14,400 yr
    Pensions = $2800/mo x12 = $33,600 yr
    This all equates to your total potential nestegg
    My SS $21,600 x 25 = $540,000–Wife SS $14,000 x 25 = $360,00–Pension $33,600 x 25 = $840,000
    Total equivilant nest egg = $540,000+$360,000+$840,000 = $1,700,000. Does not include any Retirement Savings.
    This number equates that you have plenty to support a $50,000/yr = to a $1,250,000 nest egg.

    If I were to add my Retirement Savings – 401s, 403s IRA Etc to the $1,700,000 I would have a total of $3,000,000 Grand Total Nest Egg. Since my current Savings = $1,300,000 Home not included.

  2. Anonymous

    One reason I advocate for this kind of thinking is that your earning and spending each year are much easier to fine-tune on an ongoing basis than your level of capital.

    If the 4% rule turns out to be over-optimistic, maybe all retired people need to cut back. Someone who has spent his early retirement earning a few thousand dollars a year is probably in a much better position to adjust than someone who thought they’d washed their hands of all that on retirement day.

    Thanks for the kind words, and the link!

  3. Deacon: The original 4% studies were based on the likelihood of making the money last for 30 years without running. So in that case you wouldn’t necessarily be maintaining the corpus until you die. For longer time windows (or different market conditions) a lower SWR would probably be advisable.

  4. Anonymous

    One thing I always like to keep in mind is that this only matters if you plan on the $1 Million to be there when you die. You can begin to live off of the rest of your assets and not just the interest. You just have to be sure to do “prudent” planning and leave yourself some cushion in case you live to be 112 🙂

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