How much at retirement?

**disneysteve** · 06-13-2007, 08:39 AM

The usual formula folks use is 25 times the retirement income you will need.

If you want a retirement income of $50,000, you need to enter retirement with $1.25 million. Then you can withdraw 4%/year and minimize any risk of outliving your money.

**jmjj215** · 06-13-2007, 09:21 AM

Originally posted by ms_businesswoman View Post

I saw a quick way to calculate how much one needs at retirement on here once but I can't find it now. I think it was amount of salary divided by interest rate.

Can some please help/enlignten me?

Your way works as well, and allows you to play with the interest rate. Steve's way assumes a rate of 4% (by using the multiple of 25).

**jIM_Ohio** · 06-13-2007, 10:02 AM

Originally posted by ms_businesswoman View Post

I saw a quick way to calculate how much one needs at retirement on here once but I can't find it now. I think it was amount of salary divided by interest rate.

Can some please help/enlignten me?

salary/.04 gives you the 25X number steve suggested.

**disneysteve** · 06-13-2007, 10:29 AM

Originally posted by jmjj215 View Post

Your way works as well, and allows you to play with the interest rate. Steve's way assumes a rate of 4% (by using the multiple of 25).

Just to clarify, the 4% is not an interest rate. It is a withdrawal rate, the percentage of your money you can withdraw for spending in year 1 of retirement. After the first year, you would adjust that annually based on inflation (and portfolio performance).

**zetta** · 06-13-2007, 01:53 PM

I've also seen it stated as 20x income, which works out to a withdrawal rate of 5%.

**jIM_Ohio** · 06-14-2007, 05:48 AM

The 4% withdraw rate is a safe middle ground.

3% would imply principal probably lasts forever
5% suggests around 50% of the time (in the past) someone would run out of money before 30 years.

4% withdraw rate (based on the past) suggests assets should last for more than 30 years.

Anything higher than a 3.5% withdraw rate, IMO, requires someone to touch principal during retirement. If this is the plan, then it's only a matter of time before the money runs out.

**Aleta** · 06-14-2007, 06:53 AM

When you mention these figures, you're not even considering Social Security benefits. Doesn't that play in there as well? Say, your todays needs minus taxes and savings would be $40,000. Then, you receive about $29,000 in sociall security ( both husband and wifes benefits). That leaves you with $11,000 needed outside of your benefits. If you were to multiply the $11,000 times 25, you would need $275,000. You could receive 4 or 5 % interest and still withdraw 4% this way.

Also, it depends on how old you are. Let's assume that the babyboomers will receive the s/s benefits for now.

**jIM_Ohio** · 06-14-2007, 06:55 AM

The SS benefit does not change

income needed/.04

it just lowers the income the person needs... but the withdraw rate should stay the same.

**disneysteve** · 06-14-2007, 06:56 AM

Originally posted by jIM_Ohio View Post

Anything higher than a 3.5% withdraw rate, IMO, requires someone to touch principal during retirement.

I totally understand the 4% withdraw rate, but I still wonder if there isn't some point when starting to spend principal makes sense. Nobody wants to run out of money but not everybody wants to die with $2 million in the bank either. Let's say I reach 85 or 90 years of age and I'm still sitting on a portfolio worth a couple million dollars. Even if I started drawing down at 10%/year, odds are I'd outlive my money.

**disneysteve** · 06-14-2007, 06:58 AM

Originally posted by Aleta View Post

Let's assume that the babyboomers will receive the s/s benefits for now.

I do not assume I will receive SS benefits when I do my retirement calculations. Honestly, I expect SS to still be there, but probably not in its current form. I'd rather plan to not have it and count it as a bonus when I do get it.

**jIM_Ohio** · 06-14-2007, 07:03 AM

Originally posted by disneysteve View Post

I totally understand the 4% withdraw rate, but I still wonder if there isn't some point when starting to spend principal makes sense. Nobody wants to run out of money but not everybody wants to die with $2 million in the bank either. Let's say I reach 85 or 90 years of age and I'm still sitting on a portfolio worth a couple million dollars. Even if I started drawing down at 10%/year, odds are I'd outlive my money.

4% withdraw rates will touch principal.

Assume you increase withdraw 3%/year (for inflation) and portfolio returns 6% per year. According to my calculations, somewhere between year 6 and year 10 the portfolio will start to shrink.

IMO the biggest risk is a down year early in retirement, so getting past first 6 years before touching principal is fine with me.

I also plan to use dividend growth for a portion of my income stream... and because dividend growth of S&P 500 has exceed inflation historically, I think using that strategy prevents me from touching principal longer.

**disneysteve** · 06-14-2007, 07:06 AM

Originally posted by jIM_Ohio View Post

4% withdraw rates will touch principal.

Assume you increase withdraw 3%/year (for inflation) and portfolio returns 6% per year. According to my calculations, somewhere between year 6 and year 10 the portfolio will start to shrink.

IMO the biggest risk is a down year early in retirement, so getting past first 6 years before touching principal is fine with me.

Thanks for the clarification.

**Coleroo** · 06-14-2007, 07:11 AM

i think the amount needed is an imaginary number to us young folks...it all depends on your age. Im 24 and its really hard to imagine what inflation might do to during the next 40 years of my life - not to mention the next 70 years (if i live into my 90s). By the time i reach standard retirement, typical middle class yearly incomes may be well into the 3 figures easy. It scares me to think I may need upwards of 150,000 per year and as a result i need to save 3.75 million or more. whew!

I do like the (income needed times 25 years) formula though! it makes sense.

**Aleta** · 06-14-2007, 07:12 AM

Steve: Although you are correct in your outlook about social security, you also can't discount it either. I'm with you. Save as much as you can. In my husband's and my situation, he pays 15.3% social security and so do I. We're within 7 years of our retirement, that's why I said it depends on where you are.

By the same token, you don't want to save so much that you don't enjoy some of your life now. There will be those who didn't save early on that will have to catch up. I don't know very many people who can retire at 62. That's just me and a lot has to do with health insurance.

How much at retirement?