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November, 2000


In a previous issue, we addressed this topic with Part I, concluding that, while each person must answer this question individually, a conservative approach could require that one have a well-allocated portfolio initially worth twenty times the amount one hopes to have as an annual income.

Thus, if, after considering all expenses, a family needs a minimum of $50,000 for its first year's budget, adjusted upward thereafter for inflation, retirement should not begin until it has set aside a million-dollar portfolio, one significantly, but not exclusively, invested in stocks and/or stock mutual funds.

In Part II we'll consider some variables which could markedly reduce the ratio of assets to income needed.

Many today, for example, loosely use the term "retirement" to mean simply leaving behind one job, that has occupied them for 20, 25, or 30 years or so, that they feel did not properly satisfy them, a kind of drudgery performed merely to get by, until they could begin to do what they love, perhaps a quite different vocation. For this type individual, certain that he or she, after retiring from the earlier job, will go on indefinitely working at another, but much preferable one, the amount required for retirement from the former career need only be a multiple (i.e. 20 times) of the difference between the necessary "retirement" total annual expenses and the first annual pay in the new one.

In our $50,000 annual retirement budget example, if the preferred new position pays only $30,000, the retiree will need to have $20,000 in income per year coming from investments. Again using our conservative formula, this means $400,000 (1/20 or 5% of $400,000 = $20,000) will need first to have been accumulated.

If one is in good health and intends, in "semi-retirement," to work, but just part-time, again the assets to be first assured as a nest egg can be figured from the difference between the annual budget and annual income from this part-time work. For instance, if one will receive perhaps $25,000/year as a consultant, working maybe, on average, just 3-4 hours per weekday, this leaves a shortfall of $25,000 in the budget, to be made up via a retirement portfolio of $500,000.

Another factor that could reduce the required nest-egg is, of course, a reliable source of annual unearned income. This could take any of many forms.

One person may be anticipating a $25,000 a year retirement pension or annuity, which could reduce the investments total (that he/she needs to retire) by as much as $500,000! ($25,000 divided by 5% = $500,000.) Thus, with a combination of an actual investment portfolio of "just" half a million dollars plus a guaranteed annuity of at least $25,000/yr., one has the equivalent of a million-dollar nest-egg!

Another may have a rich uncle who gives her $5000 (or even $10,000) a year, tax free, and says that such gifts will continue indefinitely, having set up a trust to this effect. Using our conservative formula, this would reduce her needed retirement portfolio by $100,000 (or even $200,000).

Finally, a variation to consider is that one may be able to achieve a higher than average rate of return on one's investments. This is a tricky one and should be approached with a great deal of caution. Just as the majority of drivers think, according to surveys by the National Safety Council, that they are better than average at driving and that most others are worse drivers than they think they are, so most investors seem to have rose-colored glasses when assessing how good a record they have, and will have, compared to others. But these beliefs do not logically compute. Inevitably, most drivers and investors are merely average, regardless of how they see themselves.

Before adjusting down the investment portfolio required for a certain annual income level, the potential retiree might see if there is an objective basis for assuming he or she is a superior investor. For instance, has there been a long period to establish a true record, with results obtained for each year, for the entire interval, and for both bull and bear markets? And has the record for equities proven to be significantly better than, for instance, the S. & P. 500 for the period?

Millions are assuming they are excellent investors who have never had the notion challenged by a true bear market, the last one (by some definitions) having occurred in 1973-1974. (In that one, my father lost well over a million dollars, an amount greater than all his lifetime initial investments to that point.)

But if you remain in excellent health (and/or are protected by good insurance coverage from the financial consequences of poor health) and have good reason to expect consistent portfolio returns above those of the market averages, the retirement portfolio need not be as great. If, for instance, your record in both booming and busting conditions, and with a well-allocated portfolio, averages 10-12% per year instead of the (well-allocated) market average of about 8%, your ratio of assets to annual income needed might have to be only, say, 13-14, instead of the 20 multiple we're recommending. Thus, if one needs $50,000/year at first to get by in retirement, has about 25% in U.S. government treasury bonds and 75% in carefully selected value stocks, and is an exceptional investor, he or she may need only about $650,000 set aside before saying "so long" to the daily grind.

With luck, after reading the above, many readers are by now already typing their resignations! :) Regardless of your particular circumstances, good luck with retirement planning.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

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