What Does It Cost To Retire?

What Does It Cost to Retire?  25 Times Income – 4 x 8 Rule

Why 25 Times Income?

In Retirement, you will have many variables at play – most of which you will have little or no control over.

Time – Will you be retired for 10 years, or 30 years?  I have several clients in their 80s who have been retired for 25 plus years.  It’s better to leave a little money on the table, than to run out too soon.

Inflation – How fast will the cost of living increase?  In 1984, when I graduated from college, I bought a Mustang, convertible for $12,500.  Today, that same car would be close to $60,000.

How much has the cost of a dozen eggs, or a gallon of milk increased over the past 10 years?

Inflation is the silent thief of our retirement dreams.  You cannot avoid it, but you can prepare for it.

Bear Markets – In our accumulation years, they are frustrating … in retirement they can be devastating!  For example:  let’s assume a 3-year investment plan – Year 1, -10%; Year 2, 0%; and Year 3, +30%.  Again, these are assumptions and are used only to illustrate this point, not a guarantee, or promise of future results.


Year 1 you put $10,000 in the market and lose 10%.  At year-end you have $9,000.

Year 2 you add $10,000 to the $9,000 and neither gain or lose (0%).  At the end of year 2 your are frustrated and still down $1,000 at $19,000.

Year 3 you add another $10,000 to the $19,000, or $29,000; but this year is a Bull Market to beat all Bull Markets and you’re up 30% on 29,000, or $37,700.  In this scenario you have achieved over a 7% annualized return over the 3 years.

Now let’s run that same scenario on a $1,000,000 nest egg with a 6% distribution rate:

Year 1, $1,000,000 less $60,000 income to live on, less 10%  ($100,000) in a Bear Market = $840,000.

Year 2, $840,000 less $60,000 to live on and no gain or loss in the Market = $780,000.

Year 3, $780,000.  Again, we have the Bull Market to beat all Bull Markets and you’re up 30% ($780,000 X 1.30 = $1,014,000) less $60,000 to live on leaves you with $954,000.

Then there’s my favorite … oops!  I didn’t see that coming, scenario.  Life is full of “oops” moments.  We can’t avoid them, but maybe we can plan for them.

For these reasons and many others, I recommend 25 times current income invested with a target growth rate of 8% and a 4% distribution rate.  Let’s see how that works out:

Assuming we need to replace $100,000 in income,

$100,000 X 25 = $2,500,000; 4% of $2,500,000 = $100,000

Now, if we take the 8% or 80% Market Risk as opposed to 10% or 100% Market Risk (Again, these are assumptions based on historical data, but are not a guarantee of future results):

Year 1, $2,500,000 less 8% or $200,000, less $100,000 income = $2,200,000.

Year 2, $2,200,000 at 0% less $100,000 income = $2,100,000.

Year 3, $2,100,000 at 24% = $2,604,000 less $100,000 income = $2,504,000.

You may have just broken even, but that’s better than being down 5% as in our first scenario. ($1,000,000 to $954,000)

In closing, nothing in life or the Stock Market is guaranteed; but building a retirement plan that takes into account time, inflation, Bear Markets and “oops, I didn’t see that coming,” is a better plan.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Estimates of returns do not take taxes into consideration.

All examples are hypothetical and are for illustrative purposes only.

Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.