A Long-Term Plan for Managing an Inheritance or New Wealth
?How much money do I need to retire?? is one of the most common questions we are asked. Of course our first answer is, ?That depends.? Since everyone has unique circumstances and goals - we take the time to learn about your financial situation and your dreams before we answer specifically.
But for the sake of this example we can make some assumptions. First, how much you want to spend in retirement? Start by defining what lifestyle you wish to lead. Where will you live? What will you do (activities, hobbies, travel, part-time work, etc)? What things will you wish to have, especially big-ticket items (cars, boats, etc.)? When you have defined the lifestyle you wish to lead, then determine how much those items or experiences cost in today's dollars.
If that exercise sounds too difficult, take another approach. Simply decide if your retirement lifestyle will cost more, less, or the same as your current lifestyle. Research of current retirees suggests to live a ?comfortable? retirement lifestyle a couple needs at least $48,648 and a single needs at least $36,319 per year. (Source: Westpac ASFA Retirement Standard, September 2007)
Once you know how much you need per year, use the chart below as a guide to how large your nest egg should be. We'll assume you're 35 years old, so the Age Pension does not apply.
To keep the maths simple, we'll also assume you'll live forever and will live off the proceeds of your investments and not the principal. (While you could plan to live off a portion of the principal each year as well, which increases the amount of money you can spend each year, you also run the risk of outliving your nest egg as it slowly dwindles? so for the sake of simplicity we have assumed you will leave your nest egg to your heirs.) We have also ignored the effects of taxes; money available to spend per year is shown as pre-tax dollars.
| To recieve this income per year. | Nest eggreqiuired (assuming a 7% return) |
$150,000 | $2,143,000 |
$120,000 | $1,714,000 |
$90,000 | $1,286,000 |
$70,000 | $1,000,000 |
$50,000 | $714,000 |
$48,648 | $695,000 |
$36,319 | $519,000 |
Keep in mind the higher your return on investment the more you will have available to spend each year (or, if you choose not to spend the difference between what you need and what you earn, your principal balance will increase instead.)
Just make sure your short- and intermediate-term plans support your long-term goals.
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