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Can a 47 Year-Old Retire
on $400,000?... Page 2
continued
Applying the formula, she determines her target investment return: $53,000/$500,000 times
100 equals 10.6%. 10.6% plus 2% equals a target investment return of 12.6%.
If J.J. can make a steady 12.6% a year from her investments, she can stay retired for
good. However, there is no investment class likely to produce steady returns as high as
12.6% a year for a lifetime. J.J. needs to decide if she wants to go for high returns or
settle for a secure but smaller return. To make high returns for a sustained period she
will have to be a full time investor which does not interest her.
In 12 years, she will have the option of receiving social security. In 20 years, she can
receive maximum social security benefits. Assuming social security is not drastically
reduced, after 12 years social security payments will reduce J.J.’s target investment
return below 10%. For the next 12 years, J.J. must do one or more of the following:
- Reduce her expenses, or
- Let go of her inflation savings, or
- Create some income to pay part of her expenses. She should not consider spending capital
as that will simply make matters worse in the future. Additionally, watching her capital
deplete each year may panic her into accepting another 60 hour a week job.
For the next five years she would have to cut down to $2,500 a month in living expense
from $4,000 a month. This would allow her to spend $18,000 less each year and therefore
create smaller taxable gains as well. That $18,000 could then be compounded each year in a
diversified portfolio of 3 to 5 non-correlated asset classes. J.J. does not feel like she
would be happy on reduced expenses.
Her inflation adjustment of 2% a year is the equivalent of saving $10,000 per year. While
it is wonderful that J.J. is in excellent physical condition, she must be financially
prepared for longevity. She cannot take a chance that her money will run out in old age.
This can be particularly devastating if she became too feeble to work.
The third option, part-time work, is the most promising. J.J. essentially needs an extra
$1,500 a month take-home pay. She may be able to find paid work with one of her charitable
groups or her Church. That way, she can both be of service and earn income.
Many people can retire early on $500,000. If they have total living expenses excluding
taxes of $3,000 a month or less they will have no problem. If their total expenses are
higher, but social security or other permanent payments reduce the amount needed from
investments to below $3,000 they can easily make it. Or if they are expert, active
investors they can make enough to cover higher spending. But J.J. has living expenses of
$4,000 a month, is 12 years from social security, and does not want to spend a lot of time
on her investments. She may find that a life style of part-time meaningful work and
part-time retirement suits her well.
Gillette Edmunds, is the author of How
to Retire Early and Live Well with Less than a Million Dollars, which describes step
by step how a retiree can live comfortably on much less than a million dollars. Many women
will discover that they can walk away from work in less than five years. This is the first
book to tackle these topics that is written by an actual retiree. Using simple, original
investment strategies and formulas, the book shows how to assemble your nest egg and
achieve steady, tax-advantaged returns every year for the rest of your life.
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