How much money is enough for you?
NOTE: The numbers provided in this article should not be taken literally and they are simply used to get the point across that you need to figure out how much money you need to live comfortably, and that inflation always needs to be taken into account. It is always important to seek professional help from a financial advisor when deciding how much you need to save.
You, like me often hear people wishing they had a million dollars. If they had this money they would retire, be happy and live out the rest of their days having beers on the beach. But would a million dollars really accomplish their dreams? Its hard to say, for some people the answer may be yes, for others no.
For simplicity’s sake let us assume that you can consistently earn 10% on your money per annum. So now that one million dollars can give you $100,000 a year for the rest of your life. Thats not too shabby, $100,000/year for doing absolutely nothing but being yourself. Maybe thats too much and you only really need $60,000/year to live comfortably, in that case you will need $600,000.
But wait, there is a problem. You can’t really get the first $100,000 until the end of the year, by which time it has suffered the ill effects on inflation. So now that first installment of $100,000 is worth around $97,500 (assuming 2.5% inflation. Well thats not too bad, maybe you will go golfing a bit less and maybe go on one less vacation. There! Problem solved, but not quite. Inflation is going to continue to eat away at you money. After 10 years you yearly earnings will be just above $78,000. Not exactly a great strategy if you plan on retiring early.
To figure out how much you would need with inflation you need to do some math (and you thought you were done with learning math!). First lets take how much money you can live comfortably on for a year, say $70,000. Now multiply that by 12.5 (10% for our return, and 2.5% to account for inflation), this equals $875,000. Thats how much money you would need to earn an average of $70,000 for the rest of your life.
Now comes the thinking part. How much money is enough for you to live on? Compare this with your current expenses and the expenses of any future plans, from there you can see if that amount works with your plans. Then just like above you can see the lump sum you need to accomplish your goal (the goal that you should set after reading this).
Making/saving a large sum like that may sound hard, but once you build alternative forms of income and invest the money you save it will be easier then you think. And Money Management And You will be here to help you every step of the way.
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Filed under: Math, Retirement, Saving
“…$875,000. Thats how much money you would need to earn an average of $70,000 for the rest of your life.”
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Not even close! The author clearly has no understanding of the subject.
A very general rule of thumb is that one can spend roughly 4% of assets during the first year, and boost their income each year per the CPI. This is based on historical returns/inflation, and would require a hefty stock allocation of around 75% - a risk level that many retirees simply won’t be able to tolerate.
With a more conservative asset allocation and with a VERY low expense portfolio, one MIGHT be able to spend somewhere in the vicinity of $30,000 per year (in today’s dollars) of an $875,000 portfolio and have a reasonable expectation that the money will last for 30 years. And that’s if you believe that the CPI isn’t understated (it is)…. and that the future won’t be worse than anything we’ve seen in the past 100 years or so (who knows?)… and ___, and ___, and ___… But there is NO WAY that you could spend $70,000 per year of an $875,000 portfolio while boosting your annual income per the CPI, and have a reasonable expectation that your money would hold out for 30 years, let alone 40 or 50 years. Not even close!
This is a subject that is FAR more complicated than can be addressed in one post, but suffice it to say that the article above is grossly erroneous in almost every respect. It’s a perfect example of why one must be very cautious when gathering financial information on the internet. There are many serious studies that have been done on this very subject.
For an example of a (free) calculator that addresses this very subject, do a Google search for “firecalc”. This is just one of many sources that deal with this subject responsibly (and check out their forums for excellent guidance).
First of I always appreciate opposing opinions. This article was not intended to your provide people with an exact number on which they would require, but to get people thinking about how much they would need to make per year to live comfortably and to take inflation into account.
This article also assumes that you spend nothing the first year, ie. you would have this lump sum the year before retiring.
I never took credit for predicting the rate of inflation over the next 100 years and was just using 2.5% as an example to illustrate my point.
You will also note that I didn’t take things into account like, variability in the market, tax issues that would arise and the fact that the fact that retirees seek lower risk investments that would not provide annual returns of 10%