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Subject:  Re: Asset Allocation Date:  4/6/2006  5:28 PM
Author:  JAFO31 Number:  50947 of 88543


<<<Also, just how much money do YOU think a person needs in order to retire?>>>

"OK - to stick my neck out I'll say between 22 and 25 times your annual income would be in the right ballpark. Or perhaps more correctly would be about 25 times your expected annual retirement expenditures (with the expenditures including taxes).

Here's the math. Let X be your income before retirement. And let's assume that you save 15% of your income each year. (You can change this assumption later if you'd like.) Finally, let's use a withdrawal rate of 4%. That's the percentage of your retirement nest egg that you will withdraw each year - and my best recollection of the oft-discussed SWD. Again, you can adjust this as you see fit.

Since we assumed you're saving 15% of your income, you are spending 85% of it on something. And once you retire, we'll assume you stop adding to your retirement savings. So you really only need 85% of your pre-retirement income to live on. If we let Y be the retirement nest egg needed, we've got:
.85X = .04Y or Y = 21.25X.
Your retirement savings would be 21.25 times your annual income. I rounded that to 22 times.

If you are a better saver and put away 25% of your income, you'll only need to save about 19 times your annual income. And if you emulate some of the FIRE stories you read and save 40% of your income, you only need to accumulate 15 times your annual income.

Yes, this is oversimplified and far too analytical. It doesn't give any consideration to changes in lifestyle. But at least its one tool to use to start estimating what you need to accumulate."

I will attempt to simply and say

Amount Needed to Retire = 25*(Necessary Retirement Income - Other Sources of Income), where

Necessary Retirment Income = annual expenses (including income taxes) plus savings for capital expenses

Other Retirement Income = non-portfolio expected income, like any defined benefit pensions, social security (subject to whatever assumptions about longevity), annuities, etc.

25 = reciprocal of 4%; if you believe that the SWR will be lower, than the multipler would be higher, but would still be the reciprocal of your expected SWR

Regards, JAFO

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