"a 4% rate of return, on average from the S&P 500 index is reasonable."
Not if you're depending on using that money in the next ten years. Or if you believe in inflation.
A 4% rate of return from an index fund is long-term average behavior, not instantaneous yield. Historically, depending on when you entered the market, a ten-year outlook could have led to anything from a huge gain to a huge loss. If you're the unlucky investor who started saving 66% of your income in the stock market in 1999, you'd still be putting off your retirement today.
Also, your definition of "king" is pretty context-dependent. I can assure you that 25k will not allow you to live like royalty in San Francisco. Or, say, if you have children. It's a difficult concept to grasp when you're in your 20s, but most people do tend to reproducing by the time they're in their 30s. Oops. There goes that 25k retirement...
If you lose your nest egg in year 10 because the market takes a dump, guess what? You're not retired anymore.
It's why real-life retired people don't put their entire savings in the stock market. Retirement funds tend to have most of your money in fixed-rate securities by the time you actually quit working.
If you had enough money to live off for fifty years, the market taking a dump isn't going to wipe it out. Especially if you invested part of it before the market got high, and your total without accounting for dumps would have lasted seventy years.
I started retirement investing in 1993. I did an APY analysis where I pretended I invested every one of my retirement contributions into the S&P-500, on the day that I invested it. From then until today, that APY would have been 6.77% . That's a far cry from 11.26% .
Did you include dividends when calculating that percentage? I have not done the math, but my intuition tells me that 6.77% is a little low. 11.26% is also high for that time period--I think that figure includes the post-WWII figure (and also includes dividends).
Yes, definitely - this is all based on the "adjusted close" values from yahoo's historical data feed.
This is interesting - I've shared this multiple times in other discussions like this, and a comment like yours is always the first response, that it seems low, questioning if I included dividends. If anything it might just underscore how our collective "societal" intuition might be a bit off in terms of long term retirement performance.
I think part of it is that people tend to contribute more to retirement when times are good, since they have the extra money, and contribute less when times are bad since they're just getting by. The problem is that the market tends to be high when times are good, and low when times are bad. So this will naturally depress performance for everyone. It's impossible to contribute a consistent amount every week/month without having a cash buffer (which would depress performance anyway).
I agree that his definition of "king" is pushing it, but it's equally silly to ignore the possibility of retiring in any of the cities in the US that are cheaper than San Francisco, i.e., in any of the cities in the US that are not San Francisco and NYC. Honestly, in a middle-of-the-road city like Houston and with full ownership of a car and home, $25k net per year would actually give you a pretty comfortable life--remember that you wouldn't have to save any of that for retirement, because you're already retired. The main hitch is health insurance and/or kids.
Also, Firecalc is a good tool for running withdrawal strategies over historical data: http://www.firecalc.com/
It gave very positive results for withdrawing $25k/year on a $1M portfolio for a total of 60 years. Obviously, though, there is no 60 year period starting in 1999 for which the data is fully known, so it has its limits and can be prone to overfitting. It does take inflation into account, by the way (by increasing your withdrawal correspondingly each year).
I don't disregard the possibility of retiring in cities other than San Francisco -- I just dispute the notion that a $25k/year "retirement" is anything but silly dreaming by 20-somethings who don't understand what choices life is going to bring their way. Want to have a family? Want to send your kid to college? Want to be ready for the day when you're old and paying for medical problems? You're not living "like a king" on $25k anymore.
"[Firecalc] gave very positive results for withdrawing $25k/year on a $1M portfolio for a total of 60 years."
Well, again, you're not likely to accumulate a $1M portfolio in a decade on a $100k salary without a nice helping of luck. And not for nothing: that 60-year period encompasses the largest bull market(s) in US stock history. Past performance definitely does not extrapolate in this case.
4% return is conservative. 7% is actually the historical average. So my 4% left plenty of room for bad years.
RETIRING in San Francisco would be a massive mistake. If you are retired why the hell are you living in a uber-expensive city. Location matters less when you don't have a job. Move up to Oregon.
Also if you decide to have children, that is a conscious decision you made to dump your millions down the toilet. I guess some people like kids enough to work an extra 30 years. I sure don't.
"4% return is conservative. 7% is actually the historical average. So my 4% left plenty of room for bad years."
It's only "conservative" if you don't understand variance.
The risk isn't in the value of the average. The risk is in the variation around that average. Like I said: if you invested 66% of your net income in the stock market in 1999, you'd be a long way from retirement today.
And if you're tempted to keep arguing this point, you might want to take a moment to consider how I know this. (Hint: the reality of a great many investors trumps your theories of how the stock market works.)
Not all stocks offer dividends, and not all investors choose stocks with dividends (there are tax disadvantages to returning value via dividends rather than via appreciation of stock value.) Dividends offer a lower risk component of return, but typically in a diversified portfolio you can put some share of the portfolio in a lower-risk investment to have that lower-risk component.
So, for growth focused investors that aren't risk sensitive, dividends can be a negative feature, and for investors that are risk sensitive, they aren't essential as there are other ways to tune a portfolio around risk. This makes, at best, only a weakly positive net incentive, and more likely a negative net incentive, for firms to offer dividends.
With 1 million, you could live off of $25000/yr, which is more than enough to live like a king if you do not have other debt payments.
You could rent a $1000/month apartment, pay for a $400/month car, eat $300/month in groceries, and still have thousands and thousands left over.