The age old question everyone asks. Essentially how much do we need to either;
- Live financially free
- Live a good retirement and leave your kids a nest egg
- Live a good retirement without worrying too much about leaving any money to anyone
It all starts with INCOME! That is, what income would you like per year and for how long. As a general rule of thumb people are comfortable to consider living with 70% to 80% of their current income. This cuts away the tedious exercise of listing out all of your expenditure and predicting into the future all the fun things you’d like to do in retirement. That being said, you may actually be happy with a much lower percentage.
So now you have a basic idea of what you’d like to live on per year, let’s start thinking about your different pathways;
- Live financially free
Let’s assume you’d like to make and spend $70k a year (continuously adjusted for inflation) for the next 50 years without working. Whilst we all want to live forever we’ll eventually be handing this to someone – but let’s assume you’ll also want them to have $70k per year (or the inflation adjusted amount). The variables below will determine how to access this type of annual return;
- Present Day Annual Income = $70,000
- Current Portfolio = Let’s assume $2,000,000
- Portfolio Average Interest Rate After Tax = 6%
- Long Term Inflation rate = 2.5%
Your remaining portfolio at the end of this 50 years will be a little over $7m, however in today’s dollars it would mean that you’d still have a little more than your original portfolio.
The KEY to this Principle is ensuring your Portfolio continues to grow by more than 2.5% (Long Term Inflation Rate) after you take out your income.
- Live a good retirement and leave your kids a nest egg
Same variables apply but this time around let’s assume you’ll cut your portfolio down by 50% and reduce your plan to 30 years so that you get more fun out of your retirement.
This means you can bump your spending to $90k (adjusting for inflation each year) and still hand over roughly $1m in today’s dollars to whomever you choose.
- Live a good retirement without worrying too much about leaving any money to anyone
Again, same variables and let’s keep the 30 year plan and a little buffer just in case. You can bump your income to $105k (again with an inflation adjustment each year) and run that portfolio down to circa $173k in today’s dollars.
Conclusion:
Retiring doesn’t have to be rocket science but you need to make sure your portfolio remains fed. 6% assumed as an after tax return each year is no small feat over such a long period. Also as mentioned at the beginning, your INCOME really directs the course of your retirement plan.
Want to learn more and try a few more scenarios? Check out the below spreadsheet to toggle your preferences.
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