However, I don’t want to run out of money either and be a burden to my children or society. How large should my nest egg be so that I can sleep well on the new bed that I just bought?
Let’s say I retire at 60---not that far away---and we both live 40 more years, which is well above our life expectancy. We can live comfortably on $6,000 per month in today’s dollars, about $4,000 after taxes. But the $6,000 has to grow at the rate of inflation (say 3%, that is, the following year we’ll need $6,180 to stay even). Further assume that my investments earn 5%, easily achievable with A-rated corporate bonds. This simple worksheet says that I need $2 million when I retire [click to enlarge]:
We can spend a lot more time fine tuning the calculation to include taxes, Social Security, lumpy expenditures such as medical care, cruises, and cars, and whether the savings are in tax-deferred or taxable accounts, but the extra precision won’t change the final number much. Am I there yet? Let's put it this way, I've got to keep working for a while---there are a few more years of mortgage and college payments--but I'm sleeping well, too. © 2007 Stephen Yuen
2 comments:
Hi Steve,
I enjoy reading your blogs. A few comments on this one:
1. Requiring $6K/month ($4K/month after tax) seems rather high, especially if you have no children at home.
2. Don't forget income from social security for most and pensions for a lucky few, which reduces the necessary nest egg.
3. Many people work part-time in their retirement. You could always use that as Mad Money - use it to pay for a cruise or nice vacation.
Health care is a huge unknown. A debilitating stroke which doesn't kill you but leaves you requiring constant care and medications can be devastating financially.
My hubby & I saved & invested a lot when we were young, even though our income was not very high - his starting salary was only $18K/year. However, this seemed like a princely sum after we lived (very comfortably) on my $350/month fellowship stipend. The key for us at that time was keeping costs low, especially on big-ticket items such as housing and cars. For years we had only one car, and we looked very hard for low-rent places close to his work.
We have financial freedom now (even with 3 kids in college), and it's a great to be able to eat out (occasionally) and to pay for the gym membership (which I USE - I want my money's worth!) w/o worrying about credit card bills. However, old habits die hard and we continue to live beneath our means, which is a good thing. We can afford a really, really nice car, but we bought a Honda Civic. Maybe we'll move up to a Prius when the Honda wears out. When the weather is good I ride my bike to work!
Dear Anon,
One of my regrets is that, although I live and work in a geographic area where (multi)millionaires are minted every day through IPO's, I've always worked for a salary at a traditional company. However, tortoises can win, too---this year I qualify for retirement health benefits, which means I'll be part of a group health plan (yes, my premium will be high but at least I'll be covered) for the rest of my life, even if I quit this year. There is the risk that my employer, which is a 110-year-old NYSE, investment-grade company, won't be around to honor its commitment, but that's not a major worry for me.
$4K per month after-tax does seem high, but in the Bay Area it's really, really easy to blow through that amount.
Social Security, pensions, and part-time income are upsides to my sleep-well number, as you were saying.
Again, thanks for your comments.
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