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How Much Do I Need To Retire? Our “Number” Calculation Sheds Some Light on the Answer
by Mark Skousen, Chairman, Investment U
Thursday, March 9, 2006: Issue #517
Are you and me headed for a retirement crisis? Judging from the numerous titles of books on the subject – How much is enough?, The Savage Number and The Number - at the local bookstore, I guess we are. Even comedian Ben Stein has written a book on it – Yes, You Can Still Retire Comfortably.
Here’s the question all of these authors are asking: “How much do I need to retire?” That is, when and if you retire, will you have enough to live on comfortably until you die?
The answer is really not that complex. (Some books ask you to answer 21 questions to find out “The Number.”) Let’s say you want to retire on $100,000 a year. Assuming that you and your spouse will get $30,000 a year from Social Security, and $20,000 a year from company pension plans, you still need another $50,000 a year to live comfortably.
And the answer is: Save yourself a trip to the bookstore!
Figuring Out How Much You’ll Need To Retire
As a short cut, you can use the Dividend Discount Model to value stock. Here’s how it works…
Using a conservative after-tax investment return of 7.5% and a long-term inflation rate of 2.5%, divide $50,000 by 5% (7.5% – 2.5%). This shows that you need $1,000,000 in your own retirement funds [401(k), IRAs] to retire. In reality, you need a bit less because the Dividend Discount Model assumes you live foreve
Easy, wasn’t it?
Basically, you need $1,000,000 of liquid assets in your accounts, besides your dependable monthly payments from your company pension plans and Social Security.
1. Focus on saving with a 401k, IRA or regular stock market account. Assess your account monthly and yearly to see how you are coming along in achieving this goal. Nothing gets your attention more than a single number in an account. Your goal is to do whatever is necessary to get that magic retirement number up to $1,000,000.
2. Start an AIP (Automatic Investment Plan), and add to your account every month, no matter what your spending/debt situation is. This is the best way I know of to live within your means automatically.
Charles Schwab and other discount brokerage firms offer automatic investment plans. I have one for myself, my wife and my children. You will be surprised how fast your retirement account will increase in value because:
- You are adding new funds into your account each month.
- Dividends/interest income is reinvested automatically.
- If you buy growth stocks and well-managed mutual funds, the value of each investment will grow over time.
I call it triple compounding.
So, How Fast Will Your Money Grow?
Let’s use a conservative example. Suppose you set aside $1,000 a month for your retirement, and invest it in a mutual fund that returns 8% a year for the next 30 years.
- At the end of year one, you will have $13,532.92.
- At two years, $27,106.07.
- At five years, $74,966.70.
- At 10 years, $185,165.67.
- At 20 years, $593,947.21.
- At 30 years, $1,501,295.17.
If you can do this with only 8% a year compounding, imagine how much money you can make if you earned 10% or 15% a year!
It can be done. Get started todayand hopefully you’ll have what you need to retire.
Good investing,
Mark
Today’s Investment U Crib Sheet
- When you set up your AIP, make sure you choose the best mutual funds available. If you wish to maximize your profits, don’t limit your investment choices. If you choose to make value judgments on which stocks you are going to invest in, you are probably going to hurt your return. For some guidance, check out Investment U # 484, Socially Responsible Investing: Vice Trumps Virtue On Wall Street.
- And for more actionable advice, take a look at Investment U # 487, Peter Drucker: Three Lessons and His Contributions to the Marketplace. Here you’ll find the wisdom of one of the greats and you can start applying it to your retirement strategy right now.
- Finally, find out how your wealth stacks up against other Americans in Investment U # 208: Wealth Statistics: How Do You Measure Up vs. the “Average Wealthy American?”
- Your Retirement Plan: Have You Calculated Your Number?
- Your Individual Retirement Account (IRA): Resolutions for Wealth & Happiness
- Dollar Cost Averaging
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