How Much Money Do You Need to Retire?
In the movie Cast Away, Chuck Nolan, played by Tom Hanks, is stranded on a remote, uninhabited tropical island after his plane crashes in a storm. After four years of isolation, he resigns himself to the fact that he won’t be found. In a last, desperate attempt to return to civilization, he builds a raft to leave the island. He gathers items for his journey from his surroundings, and from the plane’s wreckage. After successfully traversing the treacherous waves that beat against the shore of his tropical home, he realizes that he will never see the island again. Even though he didn’t want to spend the rest of his life there, it was safe. He is now chartering a very uncertain course, and only has the items on his raft to maintain his survival. As the island disappears into the fog, he knows there is no turning back.
Leaving the Shore: While most people don’t want to stay employed for the rest of their lives, it is safe and it pays the bills. When planning for retirement (building and stocking the raft with supplies), people often choose to either (1) maximize the income they can take from the assets they’ve already accumulated or (2) figure the income needed and then wait until they’ve built up enough assets to support it.
#1 – How much income can you reliably get from the amount you have already accumulated? Perhaps retirement has come to you sooner than expected because of a change at work or in your personal life (the volcano on the island is about to erupt, and you’ve got no choice but to leave). Now it is time to figure out how much income you can get from what you’ve accumulated and, of course, how to make it last the rest of your life. You could play it conservatively or be more aggressive. If you have other sources of retirement income, like Social Security and a healthy pension, you might seek higher income from investing your retirement assets more aggressively. Of course, the tradeoff is that your income could vary or stop if you experience significant losses.
#2 – How much do you need to accumulate to enjoy your desired level of income? Assuming you are in control of when you will retire (or plan to leave the island), what will be your sources of retirement income? What are your fixed and discretionary expenses? Do you plan to travel? Is your mortgage paid? Do you plan to sell your home and/or downsize? These, and many more factors, need to be considered to determine the lump sum you will need. You’ll want to dedicate some of your retirement assets to producing income, while other assets are set aside for specific future purchases. Looking at what you’ve accumulated so far, and figuring how much you can put away each month, will help you know how much longer you’ll need to work before you launch your raft.
Is your craft sea-worthy? Will it hold up in rough waters? How long before you run out of supplies? Let’s sit down together and make sure you’re ready to set sail!
David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show at 9AM on AM1380 Ormond Beach, AM1230 New Smyrna Beach and AM1490 Deland. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to info@DavidHolland.com.