So you’ve made up your mind to take an early retirement. Good for you! Early retirement, before 62, means that you will not have any social security coming every month that you can count on. In a future article I’ll tell you how to get money out of your 401k or IRA before 59½, but let’s assume that you only have so much cash right now.
A frequent question I get is where do you put money so you can live off of it, now that banks are paying 1 – 3% interest? To keep the numbers easy, let’s say you have $100,000. If you have $250,000 then multiply this example by 2.5. If you only have $50,000 then multiply this example by .5.
$100,000 at 1% is only $1,000 per year. This is not enough to live on. Even if you get 3% it will only be $3000 a year or $250 a month. I don’t know about you but $250 will not go very far at my house every month. Never mind gas for the car, utilities, etc. So I need more. $3,000 just is not going to be enough to live on. You either need a higher percentage of earnings or a larger nest egg or both. This is where proper planning comes into the financial planning picture.
Hopefully you are reading this when you are 30 and have the advantage of time for compounding your investment. If you have ten years and you only have $100,000 right now, you can grow that investment into $250,000, assuming that you can find the right investments paying around 10% a year, and paying the tax man every year on your cash investment return.
However, this is one of the big advantages to having a qualified plan for retirement like a Roth IRA. Having $100,000 in a Roth means you can smile at the tax man while you save money every year and compound your investment without paying any tax. So I am going to assume that you have $100,000 and you have it in a Roth. I’ll also show you the effect of paying tax at the rate of 28% in case you don’t have a Roth and I will post it in a spreadsheet on Google Docs so you can take a look.
Going back to our example in the Retirement Planning Spreadsheet I will assume that you were born in 1960. You turn 50 this year. Further I will assume that since you were young, you have always taken an aggressive approach to your investment account. You also have been putting in the maximum of $4,000 each year for the past 13 years, and now have $107,000. As you can see on the spreadsheet I will post, the following year you are making $11,190 a year in appreciation (interest). Just to keep things easy, I am just taking the amount in the account adding annual interest and another $4,000 each year and adding them all together.
After four years, you’ve put in a total of $16,000 but your account has a value of $20,420. That is the value of compounding. Keep going and in 13 years you have put in $52,000 and your account value is $107,900. That is how I arrived at the $100,000 figure above. After 20 years you have $252,000 and after 25 you have $432,727. That amount times 10% annual and divided by 12 months equals $3606.00. You can probably live on that amount every month.
Stay tuned for my next post when I will address how you can find 10% on your money in today’s market.
Jeremiah John,
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