Use this retirement rule of thumb to find out how much you need in your nest-egg.
Transcript:
BOB POWELL: How much do you need to retire comfortably in the us is really a difficult question to answer. For some people it might be. It might be $2 million if you need. And I’ll let me back up for a second. If what you need is an annual income of, say, $40,000 in retirement, not including social security or defined benefit pension plans or earned income. Let’s say you you need $40,000 above and beyond social security pensions, earned income. You would probably need a portfolio of $1 million if what you needed. On the other hand, was 80,000. You would need a portfolio of around $2 million. So the number really is dependent on what are your living expenses and what are your sources of income. And I would say for most people, the answer to how much do I need is to back into it.
Look at what your sources of income will be. Calculate how much you’re going to get from social security. If you’re still working in retirement, calculate what that will be and for how long that will last. If you’re lucky enough to have a defined benefit plan, calculate how much you’ll be receiving for that. And then once you do all that, you can say, here’s what my portfolio is and here’s how much it will generate. For many people, a very simple rule of thumb is to use the 4% rule, which is to say I can typically generate, withdraw, say, 4% from my portfolio, adjusted for inflation each and every year. And that portfolio should last 30 years. So if you use the 4% rule and it turns out that you have to withdraw 5% or 6% in order to maintain your standard of living, your portfolio may not last your lifetime. If, on the other hand, you could get by with 3% or 3.5% it’s likely that your portfolio will last your lifetime. And if that 3 or 4% or 3.5% is enough to fund your desired standard of living, that’s how much you need in your nest egg.
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