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J.J. Jones quit work three years ago at
age 47. After twenty years of 60+ hours a week for three different companies, her only
investment asset was $400,000 of company stocks she received over the last five years of
work. She had no idea how long she could make it on $400,000 and she did not care. All she
knew was that she wanted out. After selling shares to pay her expenses the past three
years, she has $500,000 in stock. She has yet to experience a year in which her stock's
price has declined. She is involved in two volunteer groups, exercises every day, has a
host of friends, and regularly attends church services and social functions. Frankly, she
does not ever want to go back to work again. Can she make it?
The answer depends on many factors. The formula to determine if she can live well the rest
of her life off $500,000 in investments is: ((Total retirement living expenses/$500,000)
times 100) plus Inflation =Target Investment Return.
If the target investment return is reasonable, then J.J. will be able to live off her
investments. J.J. must first determine her annual expenses. Since she has already been
retired three years, she has a realistic idea what she spends while not working. She also
has a realistic idea of what her taxes are while retired. She already has the benefit of
paying no social security taxes and being taxed only at low capital gains rates.
J.J. cannot count on having the same expenses for the next 30 to 50 years. General
inflation will raise the price of goods and services she consumes. She needs to also look
at specific aspects of her life that will cause her expenses to go up faster or slower
than the general public's expenses. The biggest factor to look at is housing expense. If
she owns her home and intends to stay there for the long haul, she can expect to have
smaller expense increases than the public. But if she rents, she can expect to have larger
expense increases.
J.J. determines that she has been spending $4,000 a month in living expenses, or $48,000 a
year and about $5,000 a year on taxes. She owns a three-bedroom condo that she likes and
intends to stay in for the foreseeable future. She is in good health. She does have a
boyfriend but she does not anticipate shared living expenses with this guy this lifetime.
Based on her best estimate, she thinks consumer price inflation will average 3% over the
next 30 years but she will have closer to 2% personal inflation.
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