How Much Money Do I Need in the Bank to Live Off the Interest?

One way or another, most of us will have to supply some of our own retirement income. Take some time to estimate how much income you’ll need -- and how you will get it.

Sep 8, 2015 at 6:06AM

Plan your withdrawals, so that your money lasts. Photo:

Here's a scary statistic: According  to the 2015 Retirement Confidence Survey, only 48% of Americans surveyed (or their spouses) have taken the time to estimate how much money they need to sock away for retirement. That's scary because if you have no idea how much money you need to have for a comfy retirement, you're not likely to achieve a comfy retirement.

Among those who have pondered the question in order to come up with a plan, many ask themselves, "How much money do I need in the bank in order to live off the interest?" It's smart to broaden that question, asking instead, "How big should my nest egg be in order to provide sufficient income in retirement?" This expands your field of investments beyond bank accounts to investment accounts, brokerage accounts, retirement accounts, and so on.

How much income will you need?
It's hard to estimate how much money you need to accumulate for retirement without having a handle on how much income you're aiming for in retirement. There are various rules of thumb, such as one suggesting that you aim for 80% of your income at the time of your retirement. Thus, if you earn $50,000 annually, you'd aim for an income of $40,000 in retirement.

That's a bit simplistic, though, as there are many variables to consider and each of us is in a different situation. For example, healthier people will likely need to spend less on healthcare in retirement than those with medical challenges, and those who want to travel a lot or enjoy many meals at restaurants will probably need to spend more than stay-at-home retirees. Your retirement spending will change over time, too. Spending can be higher in your early retirement years, when you're doing the traveling that you'd put off, and perhaps engaging in a lot of recreation, such as golf. Spending may taper off as you get older and stay at home more, perhaps engaging in fewer activities. Then, in your later retirement years, health issues might require ramping up of spending. Even these possibilities are general, though, and might not work this way for you.

Your best bet is to do your own math and come up with your own estimate of how much income you'll need each year in retirement, on average. Factor in your health, travel plans, and costly hobbies and interests, along with the usual spending suspects of housing, food, transportation, clothing, utilities, insurance, and so on. You may end up needing that 80% of your income just before retirement, or perhaps you'll need 50% or 100%. Plenty of people manage on just 50%.


Plan ahead, so you don't run out of money before you run out of breath. Photo: Dan Moyle, Flickr

How big a nest egg will you need?
Once you know how much income you're aiming for, start figuring out where it will come from. As of July, 2015, the average Social Security benefit was $1,336  per month, or $16,000 per year, but you can expect to collect more or less depending on your earning history. If you expect any pension or annuity income, factor that in, too. Whatever gap remains is what you'll need to fund on your own, via your investment accounts.

A rough rule of thumb is that when it comes to withdrawing money from a stock-and-bond nest egg each year in retirement, you should aim to withdraw 4% in the first year and then adjust that sum for inflation in following years. This "4% rule" is likely to have your money last about 30 years (though some suggest aiming for 3.5% to be more conservative). If you know you're looking for $20,000 from your investments, you can inverse the 4% and get 25 (100 divided by 4% is 25). Multiply $20,000 by 25 and you'll arrive at $500,000, the nest egg you'll need if you want to apply the 4% rule.

You can use similar math with a bank account that's paying you a certain interest rate, too. Imagine that you are looking for annual income of $20,000 from a bank account that's paying 3% interest. Divide 100 by 3 and you'll get 33.3. Multiply $20,000 by 33.3 and you'll arrive at $666,666 -- the size of the bank account that will give you $20,000 annually with a 3% interest rate. (Remember, of course, that interest rates will fluctuate over time.)

The rules even work with stock portfolios that feature dividend-paying stocks. If you're looking for $20,000 in annual income and your portfolio sports an overall dividend yield of 3%, you'll need that portfolio to be worth around $666,666 come retirement. Of course, that overall 3% yield is likely from some stocks that yield nothing, some that yield 2% or 3%, and some that might yield 5% or 6% or more. You can, over the years, aim to add more high-quality, high-yielding stocks to your portfolio, to up your expected yield. Dividends aren't guaranteed, but many dividend-paying companies are relatively stable and reliable blue chips that have been paying shareholders for decades. These days especially, dividends can reward you more handsomely than interest.

An added benefit of a dividend-heavy stock portfolio over an interest-paying bank account is that, on top of the 2-3% you'll receive in dividends, the stock itself will likely return 6-7% annually -- which is a growth rate that far exceeds most interest rates paid by banks.

One way or another, most of us will have to supply some of our own retirement income, as we're likely to find Social Security insufficient and most of us don't have pensions in our futures. Take some time to estimate how much income you'll need -- and how you will get it.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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