The 120 Million Dollars Worth of Free Beer ANSWER!
Last week, we had a more detailed look at Mr Beerver’s portfolio allocation. Well, we had a look at what he dreams to be his allocation because right now, he’s got everything in a single stock. His allocation looks like this:
Just as he dreams of having a balanced portfolio, Mr Beerver dreams of a lifestyle a bit out of reach for him right now… a lifestyle where he drinks truly LEGENDARY beer.
So, today, let’s look at what he needs to support his future drinking habit along with the rest of his lifestyle. This is from Visual Economics:
Mr Beerver will need to get 50,000$/year to pay for everything! Mr Beerver’s number is slightly higher than the average because this graph grossly underestimates his beer costs! Beer should by all rights account for a full 2% of any healthy budget! Heh… that would mean that Warren Buffet needs to drink LOTS more beer! 8)
So Mr Beerver will need to pay for all of this in retirement. His work income may stop but his expenses sure won’t! I often see recommendations of 75 – 80% of current expenses as what to shoot for in retirement but I think they’re off. Mr Beerver doesn’t plan on drinking any less in retirement but he’ll probably spend more on medicine, healthcare and replacement livers so he should expect little change in his expenses even after retirement.
Social Security will net him about 14,000$ per year… geez… that’s like a third of what Mr Beerver needs for his retirement account! Not nearly enough! The shortfall is going to have to be made by his own investment account. Fine, except that people simply don’t get enough of an education to make decent choices with their investments. They get ridiculous choices likes low-risk, high-risk, aggressive or defensive that really mean nothing at all! Looking through fund brochures to check on exactly what they hold in their bowels is also not happening for most folks. Mr Beerver would certainly prefer to just set everything on auto-pilot and go grab a beer from the fridge. In today’s world though, that’s no longer a real option. We’re all fund managers now, whether we like it or not!
So, Mr Beerver needs to find about 36,000$ of income per year to cover his expenses. When CDs used to pay out 5% after-tax, all you needed was about 800,000$ in the bank and you were in the clear! Risk-free income forever! Too bad that didn’t last. Now that CDs pay barely 1%, you’d need 4,000,000$ to get the same result! Now that ain’t gonna happen for poor Mr Beerver! He needs a better answer!
Hopefully, the allocation we presented last week will allow him to grow his assets by 5% yearly, so he’ll still only need 800,000$ to meet all of his needs. Well, that’s nice but a cool million would improve his chances to survive any volatility that he encounters during his retirement years!
So, Mr Beerver needs to get between 800,000$ and 1 million. Yeah, that’s a lot of cash, so he’d better get started right away!
(data from http://www.hrsdc.gc.ca)
Looks like most Canadians don’t get anywhere near the mark poor Mr Beerver needs. Americans don’t fare much better, btw. So we need to do SOOOO much better! Is that even possible?
Here’s my answer:
Oh Yeah! Mr Beerver is set to get over 120 million dollars in retirement! Woo hoo! He is set!Oh wait… it’s unlikely that the yearly return printed today will actually come into being. He’d have to be exceptionally awesome at investing. Not going to happen but it does illustrate the danger of taking a small amount of data (just over one month) and extrapolating it into the far future… and yet that’s what a whole slew of retirement advisors will do. I’m out of time for today, so we’ll talk more about this next time. For now, it’s time to go for a swim and a beer!