Sunday, 15 February 2015

How much do you really need to retire?

Most people don't get a retirement these days. If you do it's most likely in the form of a defined contribution plan. This means that you contribute to it through out your career and you take it out when you retire. How much money you get in that retirement is unknown. Some people get a defined benefit retirement. This is where they just pay you money for the rest of your life. These kinds of retirement plans are few and far between.

I asked myself the other day: what is the minimum amount you need to retire?

Most people would tackle this problem by taking the income that they need to live and then multiplying that by how many years they want to be retired for. This would give you a number somewhere in the millions and it doesn't account for simple compound interest and investing rules.

How much do you really need? The answer is actually quite a bit lower than you would expect. The answer is just 500k. This number would work for most people. Here is how it works.

If you invest your money in a diversified portfolio you should get at least 10% a year. If you invest 500k and get a 10% return, you will have 50k extra to live off of. Of course this is subject to tax but for a retirement, this isn't too bad.

You can actually make 6 figures in a year if you use your margin account. In most margin accounts you can borrow the same amount of money you have in your account. If you had 500k in your account, you can borrow another 500k. What poor people do is they see this and then they go buy a Tesla or some other fancy car.

What this means is that you can borrow 500k bringing the total amount of money to 1 million dollars.This gets interesting because 10% of 1 million dollars is 100k. Of course this is subject to taxes but this will give you a very comfortable income.

It seems that all you have to do is save 500k and you can retire for life. Next time we will talk about how you can make 1 million dollars annually.


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