- Location of retirement. There are low cost areas and high cost areas, e.g. New York City or San Francisco. $60,000 per year might be sufficient in low cost areas, but not in the high cost areas.
- Investment risk tolerance. Taking higher risk for higher returns, such as investing in the stock market, can affect the amount needed. In average times, the stock market offers 8-10% returns. Recently however, the stock market has provide negative or flat returns.
- Longevity. Someone who lives 40 years after retiring will need more retirement savings than someone who only lives 10 years after retiring.
- Amount of debt. Retirees without mortgage, auto or credit card debt can significant lower their retirement
expenses, and thus reduce the amount of retirement savings needed. - Lifestyle. The type of lifestyle impacts monthly expense needs, which determines the amount retirement savings needed.
expenses, and thus reduce the amount of retirement savings needed.In our case, it was fortunate that we targeted for 20 times our salary before retiring in October, 2007. We actually retired with savings at 23 times our salary. However, the bear market of 08/09 reduced the amount to 13.7 times our pre-retirement salary by March 31, 2007. For us having a savings margin of safety was a prudent decision giving the subsequent recession and bear market.
For more on Reaping the Rewards Reflections, check back every Friday for a new segment.
This is not financial, saving or retirement advice. Please consult a professional advisor.
Copyright © 2009 Achievement Catalyst, LLC
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1 comment:
Wow! To drop from a savings to salary ratio of 23 to 13.4 is shocking! Your volatility of returns is dangerously unacceptable. This is not my opinion but proven out by math.
It is important to understand the mathematical relationship between average returns and compound returns. Compound returns are the only returns you can spend, and they are dramatically lowered relative to average returns with the type of volatility you are experiencing. (An excellent explanation of the subject can be found in "Unexpected Returns" by Easterling.)
If you seek financial security then it is essential to develop investment risk management skills to control volatility and downside risk.
Getting your retirement savings lopped in half is not acceptable, and anyone who tells you otherwise doesn't know their math. You must have a defensive strategy to manage the risk or you will never have retirement security.
Hope this helps to point your investment strategy in a positive direction.
Todd Tresidder
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