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August, 2000


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.

Since we tend to be conservative, we think it better to calculate your minimum retirement portfolio based on half the average annual equity return. Instead of 10%, if you can live comfortably on 5% of your portfolio, then you probably have enough for retirement.

This will give you a cushion in case of significant market downturns and allow the balance of your assets to keep growing, offsetting the effects of inflation.

We would further suggest an allocation of your assets among different types of investments, for instance 25% in fixed income securities and 75% in carefully selected long-term value equities, which reasonably can offer The Intelligent Investor, to use Benjamin Graham's term and the title of his classic work, about 9-10% a year on average.

Thus, the answer to how much you need for retirement, if you expect to spend $100,000 a year, becomes $2,000,000 (5% of $2,000,000 = $100,000).

On the other had, if you can somehow get by on $50,000 a year, a $1,000,000 portfolio will do very nicely! (In fact, we would take that option in a second.)


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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