What size portfolio is required for a comfortable retirement? There are numerous variables to consider. Here is an example for our fictitious couple.
We begin with current data on what the average retirement annual salary is and what the average household is living on in the United States. Looking up this data, I found that the average retirement income is $50,200 per year and the average non-retired household is spending $63,036 per year. For ease of calculation for our fictitious couple, let’s assume they need an average income of $60,000. Plug in your own number as an annual retirement income will vary widely depending on where you live in the country. For example, some couples will “require” an income of $80,000 or $100,000.
This example assumes one is either renting or the house is paid off. Regardless of expenses, our retired fictitious couple needs $60,000 annually for living expenses.
And now for a few more assumptions. Where does one derive income in retirement? 1) Social Security. 2) Pensions. 3) A retirement job. 4) Investment income.
In this example I’ll assume no pensions or a retirement job. If one receives a pension, the strain of deriving income from investments is greatly reduced.
An annual income requirement of $60,000 per year translates to $5,000 per month.
- Social Security from spouse #1 = $1,500
- Social Security from spouse #2 = $1,300
Again, fill in your numbers. Our fictitious couple collects $2,800 per month from Social Security leaving a gap of $2,200 per month that needs to be made up from investment income, assuming there is no income from pensions or other income source.
Now we get into some tricky figuring and assumptions. Let’s assume our fictitious couple laid out a saving play years ago so the income thrown off by the portfolio would generate the required $2,200 and they would not need to dip into the corpus of the account to meet this income requirement. This being the case we now come to yet another assumption.
General wisdom dictates one should not draw more then 4.0% from a portfolio so as to maintain a stable amount barring excessive inflation. Conservative advisors recommend no more than 3.0% be withdrawn from the portfolio. My very conservative recommendation is to push that number down to no more than 2% per year be withdrawn from the portfolio. For this example, let’s run out our calculation using the conservative figure of 3.0%
Assume our fictitious couple had the foresight to save or build a portfolio that would throw off a monthly income of $2,200 per month while not withdrawing more than 3.0% from the portfolio per year.
Annual income from the portfolio is 12 x $2,200 or $26,400 per year. That works out to a portfolio of $26,400/0.03 = $880,000. However, it is not all that easy to set up a portfolio that generates an income of 3.0% per year, particularly if one wishes to participate in the growth of the stock market. In case of inflation, one needs to set up a portfolio that will counter rampant inflation. Many of you remember the late 1970s and early 1980s.
The current yield of the Total U.S. Stock Market is 1.3% if we check the yield of VTI. Remember, the fictitious couple does not want to dip into the corpus of their portfolio. This requires another calculation.
Assuming our portfolio yield is something close to the current yield of VTI, we need to work with a much larger portfolio. Here is the bad news.
Our retirement portfolio works out to be $26,400/0.013 = $2,031,000 or over two million dollars.
Couples who pull in money from pensions need to realize just how important that source of income is as pension income relieves the stress on income required from an investment portfolio.
Perhaps an industrious reader will put together a spreadsheet using the above assumptions and share it with ITA readers.
Comments and suggestions are most welcome. Post your ideas and thanks in advance.