When it comes to investing for retirement there are several questions you need to ask:
To understand what an amazing change occurred in the late 20th century, just consider these statistics on life expectancy:
Thanks to medical advances and improvements in lifestyle today's 60 year old baby boomers can expect to live another 25 years.
You'll only need 65-80% of your pre-retirement income. You won't have work related expenses or Social Security taxes.
But there are several simple "rule of thumb" formulae that are easy to understand and allow you to come up with a "ball park" figure yourself:1. The 4-Percent-Drawdown Rule.
This rule was published in 1994 by certified financial planner William Bengen who had researched actual retirement scenarios and equity returns over the past 75 years.
Bengen concluded that retirees who draw down no more than 4% of their Retirement "Nest Egg" each year (adjusted for inflation) have around a 90% chance their money will last around 30 years. He also suggested a regularly re-balanced split between equities (50-75%) and bonds to ride out market ups and downs.
Even so, there is still a 10% chance you'll outlive your money depending on your investment decisions and market extremes.
The key to retirement survival is not to suffer any huge losses in the first 10 years.
And in prolonged, severe bear markets (like the Great Depression) these assumptions may not stack up. Many people who retired in early 2000 and were heavily invested in stocks were punished in a long slide that saw their retirement nest eggs halved.2. The 10 Times Your Salary Rule.
Saving 10 times your income by age 65 should allow you to live on around 70 percent of your pre-retirement income. While saving 12 times your income should provide you with about 80 percent of your pre-retirement income.3. The Multiply X 25 Rule.
This implies that if you need $40,000 to live on then you need savings of roughly around $1 million (assuming you don't receive any other Social Security benefits or pension) and your house is paid for.
Problem is... most retirees won't have anything like $1,000,000. The reality is many won't even have half that amount.
Instead they'll be desperately trying to achieve higher returns (of 5-10% or better) on their savings, and may be tempted to take more risks to get them. Ultimately their kids may not end up with the inheritance they were hoping for either.
Retirement planning is the art of matching future income with expenses.
Furthermore, they'll still need to reassess their investment outcomes each year (taking into account the inflation rate, interest rate movements, changes in equity and real estate prices, etc). Then, depending on whether they had unexpected costs (like medical expenses) or achieved better-than-average-returns they may have to revise their drawdowns up or down.
Investing for retirement...Retirement Lost; the pension crisis.
Investing for retirement Rule No.1...Start Early.
Investing for retirement...Where To Find Help?
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