UnThreaded | Threaded | Whole Thread (3) | Ignore Thread Prev | Next
Author: jimsykora Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76078  
Subject: Don't outlive you nestegg Date: 12/24/1999 10:55 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 7
A simple formula for the size of a nestegg that you shouldn't outlive is [(Annual Retirement Income needed in the first year of retirement)/(%rate of return on investment minus %inflation rate average estimate)]+1 Income.

Here is an example: Lets say I think I can live on $50,000/year (before taxes)when I retire in 2005. I assume that my investments will average 8% annually and inflation will be 3%. If all of my assumptions are correct, I need [$50,000/(.08-.03)]+$50,000 = $1,050,000 in my nestegg.

The first year I withdraw $50,000, then 2nd year I withdraw $51,500 (3% inflation adjustment)etc. This can go on forever as long as my assumptions hold.

I'm a little concerned about getting 8% on my money year after year, so my personal strategy is to have 75% of my nestegg in stocks and 25% in laddered 5 year bonds. I can then live off the selling of bonds and their interest stream for about 6 years if need be. Most stock market downturns have recovered within 6 years.

Put in any estimates you want for rate of return, inflation, and retirement income. For me, I keep coming up with a nestegg that is 20 times my first year's retirement income.

This is a conservative strategy that will leave an inheritance for somebody but it also provides some cushion when life doesn't go as planned: eg. higher inflation rate, lower rate of return on investment, unexpected medical expenses, children in need of money, etc.

There are a lot of other factors that I have ignored in this formula. If a lot of your retirement income is from captal gains, you won't need quite a much income (lower taxes). Social Security (if still around) can reduce the required size of your nestegg and it adjusts for inflation. A typical pension plan or annuity from a 401k plan will pay a fixed amount periodically but is usually not adjusted for inflation. Moving to a state with higher or lower income taxes will affect your retirement income needed.

Determining your requirement income is also a challenge. I look at my current salary and subtract off retirement savings. I then adjust that "current lifestyle" income for more vacations, higher medical expenses, paid off home loan and inflate that figure for the year that I expect to retire if it is more than 2 or 3 years in the future.


Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (3) | Ignore Thread Prev | Next

Announcements

The Retire Early Home Page
Discussion on accelerating retirement day.
Pencils of Promise - Back to School Drive
"Pencils of Promise works with communities across the globe to build schools and create programs that provide education opportunities for children."
Post of the Day:
Value Hounds

Netflix Riles Investors
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement