This is a very important question for just about everyone. There are some people who think they will work for ever – mostly self-employed people – and love what they do so retirement isn’t a big deal to them – until they can’t work anymore. Other people will need to retire at some point either because of health reasons or being forced out of the workforce by their employer or because of the inability to keep up in their field with younger workers (physically or technologically). For me, I think it’s better to prepare for the worst which means investing (not just saving) for retirement.
How Much Do I Really Need for Retirement?
When deciding how much you need for retirement, there are two ways to look at the money you need, as an infinite source of income where your investments are enough to provide the income required to support the lifestyle you desire (a perpetual annuity, but it doesn’t need to be invested in an ACTUAL annuity) OR the income you will draw will be a combination of interest and principal such that if you live to your expected death age, your investment will be fully depleted. I’m not a fan of the 2nd way since there is no margin for error unless your money is invested in the market and the market completely out-performs the assumptions you have made with regard to the return on investment.
When you retire, you will need investments that provide income in addition to whatever you will get from social security. Here is a list of investments that will produce income:
- Investment properties – either SFRs, 2-4 unit properties, or commercial real estate
- Bonds or bond mutual funds – if you invest in bonds, you will need to set up a bond ladder so that you will receive income every month. Financial institutions like Fidelity Investments can advise you with regard to bond ladders.
- Dividend stocks or mutual funds that invest in dividend stocks – there are many stocks that pay a regular dividend. IBM, as of the time of this writing, pays an annual dividend of $6.28 per share, which is a yield of 4.48%. At the current price of $136.35, a portfolio of $2,000,000 would be able to own 14,600 shares of IBM which would yield an annual income of $91,688 or $7,640 per month. IBM will likely see appreciation in addition to paying an annual dividend for an even better return on investment.
I always recommend diversification within asset classes as well as among asset classes. Hence, a good sized portfolio should include real estate, stocks / stock mutual funds, and bonds / bond mutual funds. Additional, within each of those asset classes there should be diversification so don’t invest all of your money just in IBM, Apple, or any other single company.
Finally, here is the link to my Retirement Spreadsheet which will allow you to get an estimate of what is needed for you to reach your retirement goals based on your current situation. Just fill in the yellow highlighted fields with your information and it will do the calculations for you – this is an estimate and doesn’t account for inflation, tax-advantaged investment accounts like Roth IRAs, or income taxes.
Feel free to contact me if you have questions at (702) 812-1214 or (801) 893-1737 or by email at jed.wunderli@noblehomeloans.com.