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How Much Do I Need To Retire?
Investment U E-Letter: Issue # 517 How Much Do I Need To Retire? Our “Number” Calculation Sheds Some Light on the Answer 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 isSave 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. Of course, not everyone sports that kind of money. If you don’t, here are some simple strategies that will help you achieve this goal… How To Amass Enough Money To Retire Securely and Comfortably 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:
I call it triple compounding. 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.
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! Good investing,
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