You're going to be retired for a very long time
“The good news is: we’re living longer. The bad news is: we’re living longer.”
That’s a central theme in author Terry Savage’s new book The New Savage Number: How Much Money Do You Really Need to Retire – a handy guide that walks you through the process of deciding how much more you need to save each month to reach your “magic number.”It's a sobering read, particularly when you look at how long your money has to last – the top priority for investors, according to a recent J.P. Morgan study.
Consider a $300,000 portfolio earning a 6 per cent return -- I know, I know, hard to find these days but not an unreasonable assumption longer term.
Scenario No. 1: withdrawing $20,000 pre-taxes a year from age 55 to age 90 leaves you with $61,757 at age 90.
Scenario No. 2: delaying withdrawal by five years, then withdrawing $20,000 pre-taxes a year from age 60 to age 90 will leave you with $130,395 at age 90.
Scenario No. 3: withdrawing $25,000 pre-taxes a year from age 55 to 64 and reducing withdrawals to $20,000 a year from age 65 onward will result in your money running out by age 81.
Scenario No. 4: withdrawing $30,000 a year from age 55 to 64, then reducing withdrawals to $20,000 a year will result in the money disappearing by age 74.
All these “what-if’s” ignore inflation though. And the impact of even the modest inflation we’ve experienced recently can cut a portfolio’s purchasing power in half over 20 to 25 years.
To get a feel for this, use the rule of 72. Simply divide 72 by the anticipated inflation rate. So, at an inflation rate of 3 per cent, it would take 24 years (72 divided by 3) to reduce the value of the money you put aside by half.
Once you get there, you’re likely to be retired for quite a long time. Plan accordingly.
By Gordon Powers, MSN Money