We know that most students are interested in personal
finance topics, so we like to post on personal topics occasionally. Consider
your retirement. How much should you have saved for a comfortable retirement? A
recent article discusses this topic and reports some conflicting
conclusions. If you notice, Fidelity suggests that you have 10 times your
pre-retirement salary saved at age 67, while the next paragraph notes that, according
to Tony Robbins, you need 20 times the annual amount you want to spend in
retirement. These two rules of thumb are consistent only if you withdraw half
of your current pretax salary in retirement. Of course, these are only rules of
thumb. Life expectancy is an important consideration. For example, on average,
women live longer than men, which suggests women need more money for retirement
for the same withdrawal amount. Another consideration is whether you are
willing to dip into principal, which means you would need less than if you do
not wish to dip into principal. You also need to consider the amount of risk
you are willing to take with your investments. If you are only willing to
invest in a savings account, you will need to have more saved, on average, than
if you are willing to take more risk and invest in stocks.
We would like to close with a rule of thumb calculation for
you. Research into retirement withdrawals using historical market returns
suggests that withdrawing 4 percent of your retirement portfolio value per year
has generally supported at least 30 years of withdrawals, assuming the
portfolio is 60 percent or more common stocks. We should state that many
retirement planners would consider this a relatively risky portfolio in
retirement. If you are willing to accept this risk, what multiple of annual
retirement spending does this suggest you need for your retirement portfolio?
What happens to this multiple if you are more risk averse?
