It’s time for my annual “Life of Riley” report. This is the report in which I estimate how much money you need to be at the threshold of upper-crust living — call it the lower upper crust — without the indignity of work.
This year you need an estimated $4,192,720 if all of your income comes from a 50/50 portfolio of stocks and bonds producing dividends and interest. The recent increase in interest rates — the one that has the entire planet trembling — dropped the required amount about $600,000 in a single month. If interest rates rise further, you won’t need to be nearly as rich to live the Life of Riley.
If you dare to withdraw from your portfolio at a rate of 4 percent, which would require taking some principal, you’ll need a mere $1,850,000. And if you’re retired and about 40 percent of your necessary income comes from Social Security, you’ll need still less, a piddling $1,110,000.
Whichever measure you use, it’s a lot of money — at least a cool million. That’s far more than most people have, whatever their age. The only good news here is that the amount of money needed has declined from last year because fixed-income yields have risen.
Another key figure is the actual income needed to be at the edge of the lower upper crust. I’ve defined it as the minimum income needed to be in the top 25 percent of households in the United States. That was $69,126 in 2010, which is the last year for which the Internal Revenue Service has produced the data. This year the IRS announced a new methodology for calculating. It raises the income somewhat over the older method. Adjusted for inflation, it would be about $74,002 for this year.
Yes, that top 25 percent threshold is a bit arbitrary. It’s in the same ballpark that some call the “mass affluent,” and a lot of people would rather be affluent without the mass part. On the other hand, it’s an income that three out of four people wish they had, so while you may not be a reader of Vogue, Town & Country or the Robb Report, you can be quite sure that you’re living higher on the hog than most.
One of the interesting things we can observe is that of all 28 years covered, retirees and people who withdrew money at a 4 percent annual rate had only one year in which the amount of money required actually declined. It was 2009 — the year the economy really tanked. In fact, the figure for retirees has been reasonably stable since it first crossed a cool million in 2008. Still, it takes a lot of money to be independently lower upper income.
Is there some good news here?
Yes. It appears that interest rates and stock dividend yields have bottomed. If stock and bond yields climb toward more normal levels in a recovering economy — say, to a 5 percent fixed-income yield and a 3 percent stock dividend yield — a 50/50 portfolio would yield 4 percent, not 1.77 percent. If that happened, the amount of money you’d need to live the Life of Riley would be cut by more than half.
SCOTT BURNS is a principal of the Plano-based investment firm AssetBuilder Inc. His website is www.scottburns.com .— Universal Uclick