Cashing In: How Much Do You Need?

When is it time to hang it up? Assuming we are mentally prepared and know what we will do after we sell or transition, we can tackle the next question: how much do we need? Unfortunately, passive income from interest and dividends today is less than it was, so I strongly urge you to work with a financial planner. Here are a couple of concepts as well as realities to get you started, or at least shocked.

How much will you need? Let’s start with what you make now. While some say you can live on less, others say it often takes more for we want to travel or even eat out more often. Again, a financial planner will be of great help. So, let’s assume it is what we make now. Obviously, if we can’t, then we’re not ready to retire; rather we should be fixing our business.

Let’s further assume it is $100,000 a year. Are you ready for the next shock?  The days when we could count on 5% to 7% earnings are gone. A quick glance at secured interest rates is more likely to show rates of 1% to 2.5%.

However, a recent report in USA Today showed that over the past 10 years, a portfolio equally divided between the Standard and Poor’s 500-stock index, 10-year Treasury notes, and three-month Treasury bills returned an average 4.24% and notes that inflation has averaged 2.4% during that time.

So, let’s be optimistic and say you get a savvy return of 4%. A simple calculation shows you need $2,500,000 ($100,000/.04) to return $100,000. That, of course, means when you croak you will leave $2.5 million behind so it really doesn’t have to be that much.

To calculate the amount precisely, we need to know when you plan to die. Okay, maybe you don’t know that or want to think about it, but you can find a number of life expectancy calculators online. For my basic calculation, I’m assuming 20 years.

So, how much will we need to draw the funds down to $0 in 20 years? That would be something like $1,750,000 which is a little more manageable but I assume it’s shocking to many.

Now, if you are 40 and again assuming a 4% return, how much do you have to invest every month to have $1,750,000 million of assets by the time you are 65 (25 years)?

You can find many savings calculators on the Internet. Assuming we start with $0 and contribute $3,500 a month at a 4% rate of return, we would have $1,786,799 in assets by the time we’re 65. Close enough.

This shows the general method that’s used. Figure out how much we’ll need at a date certain, such as when we are 65, then figure how much you will need to put away each month to get there.

How realistic are these numbers? There are millions of retirement articles found on the Internet. One that I found pretty much on point was written as an opinion piece by Teresa Ghilarducci, professor of economics at the New School for Social Research. She wrote in the New York Times (July 21, 2012), “… we need about 20 times our annual income in financial wealth to maintain our living standards into old age … If you earn $100,000 at retirement, you need about $2 million beyond what you will receive from Social Security. If you have an income-producing partner and a paid-off house, you need less. This number is startling in light of the stone-cold fact that most people aged 50 to 64 have nothing or next to nothing in retirement accounts and thus will rely solely on Social Security.”

So, you might have other assets to put into my guess of a $1,750,000 retirement fund, which is great. Unfortunately, it is my experience that many of us business owners fall into Ghilarducci’s estimate of having nothing or next to nothing.

So that means many of us must rely on our business to be the major source of our retirement funds. And that spells trouble for many.

Again, I urge you to work with a financial planner on the best plan for you; and the sooner you start, the better off you will be. But now you have a general idea of how it’s done. Next month: Let’s starting looking at what the business might be worth.

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Get Tom’s weekly email thoughts on Cashing In by going to www.cprint.com and signing up for CPrint Silver or message tom@cprint.com. You can also reach Tom at (304) 541-3714, connect on Facebook and LinkedIn and follow his business tweets on Twitter @tomcrouser.  Tom is Senior Contributing Editor of this magazine, chairman of CPrint International and principal of Crouser & Associates, Inc., 235 Dutch Road, Charleston, WV 25302, www.crouser.com, www.cprint.com or call (304) 965-7100.

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