Post of the Day
July 14, 1998
Ask a Foolish Question Folder
Subject: Re: Sleepless
"Am I paranoid??"
Yes, you are. So are we all. There's nothing funny about working your whole life, to retire and wonder how you are going to pay the bills for the next twenty, thirty, or whatever years. I'm 45 yrs. old, with a wife, a 3-year-old daughter and a baby due in December. I think about college in 15 years for two kids and my retirement simultaneously. (I guess I finally figured out one reason to have kids early!)
According to the information you read at this site, (a) to retire without worry, you should have 20 times your annual expenses socked away, and (b) you can probably make more money over time putting your money in equities directly than in mutual funds. The 20 times your expenses figure is one quoted in some of Robert Sheard's articles, and it aims for the following scenario:
(1) Take out your annual expenses and put it into a 'safe' investment, like money markets or CDs (as long as part of it is immediately liquid, of course).
(2) The appreciation on the balance will leave you with at least as much money at the end of the year as you started with.
(3) Therefore, your core nest egg never really disappears, and you could theoretically go on living off your retirement funds forever.
Mr. Sheard has discussed how this plan works even when the market is taking a dive. By the first rule of thumb, and using your figure of $72,000 per year in expenses, it looks on first glance like you may be a little short, but not by that much. That doesn't mean that you are going to wake up broke one morning, but that perhaps your nest egg would gradually disappear over time. At the base that you are starting with, this could take a long time. For example, I ran a quick spreadsheet of your situation, assuming a $950,000 starting point ... that is, let's say the $800,000 hasn't appreciated a dime in the last 2 years, to go with the $150,000 stock value. If your mutual funds appreciate at 8% (the average as I recall), and if your expenses increase at the rate of inflation (say 3%), then you will indeed run out of money ... when you're 81.
However, many of these assumptions may differ. You may be (probably are) starting with more than $950,000 at the moment. Your expenses may not escalate that fast (by the time you are 80, that would assume you are needing about $122,575 per year to 'get by'). Or they may escalate more quickly, of course. The rate of return you get may be more ... or less. For instance, if all the above assumptions are taken as gospel, but you get a 19% return on your investments (approximately what the Fool claims they could have gotten over the last forty years or so), then you would have nothing to worry about ... by the time you are 100, you would need over $220,000 for expenses, but your investments would be worth more than $368,000,000!!
Obviously, you shouldn't assume this kind of return, even if you were to move everything you own into equities. You can, however, sit down with a spreadsheet and work out as many scenarios as you like, and get a feel for what you think is a sensible long=term plan on your own. Then, you should probably talk more and in more depth with your financial planner, to see what assumptions s/he is working with, and what is meant by spending more money.
You can also go over to the Retirement Planning area of this site:
All of these tasks are meant to raise your comfort level with your current situation, or to re-work your plans to something you will be comfortable with.
Then you can get a little more sleep. :c)