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We likely shall be revisiting this topic with a new focus later, but want here to make an initial stab at responding to the popular question: "How much do I need for retirement?"
The answer is not necessarily any fixed amount, say $1,000,000. Suppose that, on average, your portfolio returns 10% over the long-term and you figure $100,000 will be plenty to meet your retirement needs (including every expense: taxes, mortgage, transportation, gifts, emergencies, food, entertainment, travel, wardrobe, new technologies, etc.). So, you plan on taking 10% out each year. That would seem to fit like a glove if you have set aside a million dollar nest egg.
But what do you do if, the first year after you retire, the equities market (where you are making that 10% average return) drops like a stone, perhaps 40% or so, as it did in '73-'74. Can you then live on only $60,000 (10% of the new portfolio value) per year?
And what about inflation? It has averaged between 3-4% over the last half-century or so in the U.S. While this does not sound like much, compared with the 20+% returns folks have been making in the stock market recently, over time it can make significant inroads into your buying power if your portfolio does not keep growing.
At a 3% inflation rate, your $1,000,000 portfolio after ten years will be able to purchase about what $700,000 would have a decade earlier. (Thus, your 10%/year $100,000 would then be buying about $70,000 worth of stuff.) To offset a 3% inflation rate and still provide the original buying power, your portfolio would have to return an average of 13% per year. It is highly unlikely any single investor can consistently exceed the average annual return of equities (10-11%) year after year in retirement.
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