Archives for June 2010

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How Much Money Do I Need to Retire? (In 2 Easy Steps)

People ask this question all the time. And, in my experience, most people assume that answering the question will involve a lengthy process of complicated calculations.

It doesn’t. It’s actually quite easy:

  • Step 1: Determine how much income you will need from your investments each year. (There’s no way around this step. If you skip it, you’re just guessing.)
  • Step 2: Find out how much it costs to buy an inflation-indexed single premium immediate fixed annuity that will guarantee you that much income for the rest of your life.

That’s it. Nothing tricky about it really.

That said, it’s worth making a few related observations.

First, you cannot safely retire on less money. Reason being that with an annuity, you get a payout that is higher than could safely be taken from a typical portfolio of stocks/bonds/mutual funds. (In exchange, you give up the possibility of leaving the money to your heirs.)

Second, if you want to leave something to your heirs, you need more. (Naturally, how much more you’ll need depends on how much you want to leave behind.)

Third, the more money you have in comparison to your necessary investment income–that is, the lower your necessary withdrawal rate–the less of your portfolio you’ll need to annuitize. If your necessary withdrawal rate is low enough, you may not need to annuitize at all, as you’ll be able to get away with a typical stock/bond portfolio.

And finally, when it comes time to actually buy that annuity, you’ll want to a) look for insurance companies with strong financial ratings, and b) do your best to stay under the limit backed by your state’s guarantee association.

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Topics Covered in the Book:
  • How to calculate how much you’ll need saved before you can retire,
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  • Click here to see the full list.

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