Why Is My Retirement Different from My Dad’s?

August 14th, 2011

How much do you need to invest to live off your money?

It’s a long time ago and I don’t have the details, but I remember that my Dad quit working when he was 65 and spent the next 18 years pruning the roses, tearing up the golf course and reading the papers.

Me

I’m 73 and still working and trying to stretch my salary from one end of the month to the other. Somehow, my retirement is different and it’s not me that’s to blame. Other things have changed and left me out in the cold. So I work and the truth is, I enjoy it. I like waking up in the morning knowing that I have something to do.

On the other hand…

I often think about stopping work, especially on the days when things don’t go so well. I find myself making mistakes and I find myself not understanding a conversation or argument as I used to. Perhaps it’s time to quit…

Question: How much money do I need?

Answer: How much longer do you intend living?

Many people think there’s some magic number of how much they need to have to be set for life financially. And I suppose there is a number that’s big enough that it would cover the financial needs of most people. But the amount of money we must have to get us by in life depends on how much we spend or need each year. And there’s just no way to give a pat answer that will be appropriate for all investors.

I’d also like to maintain my standard of living

Let’s say I want $50,000 a year. Inflation is about 3.5% a year and income returns about 5% a year. Using these numbers as a guide shows that I have to put away $1.2 million dollars at the beginning of the 30 year period. No good for me. In any case where can you get a 5% return? That’s a key to the puzzle. With U.S. Treasury rates so low, you’ll need to take some risk to achieve 5% yields in the current environment.

A portfolio

One example portfolio that might get you there could be a mix like IFA.com Portfolio 10, which is the safest one the investment firm offers. This portfolio holds 8% in U.S. large company stocks, 4% in small company stocks, 2% in real estate, 4% in international, 2% in emerging markets and 80% in bonds. Historically, which isn’t a predictor of future success, over time this portfolio generated a long-term average return of 5.6% on average a year. But with the added risk, including the exposure to stocks, investors need to be aware that a few bad years in the market could curtail your gains.

Do the exercise

Again, the above scenario may not be right for you or for most people. However, the exercise of backing into how much money an investor needs to reach a goal, and understanding what risk must be taken to get that return, is a valuable exercise for all. Guess I’ll just keep on working, mistakes and all.

This entry was posted on Sunday, August 14th, 2011 at 2:26 am and is filed under Business, Economy, Employment, Finance, Retirement. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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