How much do you need? For a traditional retiree, $200000 can be enough. A younger retiree needs more. Partial retirement may be a better choice.
The traditional retiree has paid off his mortgage. He no longer contributes to a retirement plan. He no longer pays social security taxes. His kids are fully grown and out on their own.
He draws social security. He has Medicare. His NEEDS are limited.
In much of the nation, social security plus an additional $10000 per year income (with adjustments that match inflation) is sufficient. A retiree can live comfortably.
My research shows how he can withdraw 5% of his nest egg (plus inflation) indefinitely. Doing so is straightforward. With care, his withdrawals can be as high as 6% (plus inflation).
A nest egg of $200000 is sufficient even in today’s market.
Younger retirees need to fill in several gaps. Not only do they need to cover the social security income stream, they need to pay for health care, which is very expensive, running in the neighborhood of $10000 per year in later years.
This lifts one’s needs to $600000. Added to this are the mortgage and providing for one’s family.
Many younger people choose to work part time. If they work enough to receive a health benefit, they receive the equivalent of an extra $200000 in investments. Otherwise, high deductible policies make sense.
Working part time also fills the gap that social security will fill later. A $10000 amount of take home pay with health insurance is the equivalent of $20000 per year in income, except for the very young. This is equivalent to $400000 in investments.
There are many other expenses associated with working full time such as transportation and clothing that a younger person can reduce if he chooses semi-retirement.
Once again, a nest egg of $200000 is sufficient.
Full retirement requires the full $600000 plus enough to provide for a family. An extra $10000 per year should be sufficient. This brings the nest egg up to $800000, assuming a 5% continuing withdrawal rate that increases to match inflation.
These numbers correspond to the traditional studies and their $1.0 million nest egg with 4% (plus inflation) withdrawals. They claimed to guarantee an income stream for 30 years.
Focusing on dividends, timing the market on an INTERMEDIATE TERM basis (not in terms of only two or three years), and shunning stock sales lifts the continuing withdrawal rate above 6% (plus inflation). Using all of my techniques with care, you should be able to match the traditional income stream of $40000 per year with a nest egg of $670000. Yet, I urge caution. I recommend withdrawing no more than 5% per year for the first five years just in case my research has a hidden flaw. This is a reasonable precaution. I am engaged in cutting edge research.
Even those who wish to shun all risk entirely should take advantage of my findings. Click on the TIPS Table button on the left side of the page. A retiree can safely withdraw 4% of his original nest egg for 35 years using a TIPS ladder, much better than the traditional 30 years with stock portfolios.
John Walter Russell
August 27, 2007