Feathering Your Nest (Egg)

By Mark Mills, CFP

How much money will you need when you retire or assume a lifestyle of part-time work? That depends on your spending patterns. Every one needs to figure out their particular budget requirements. Based on the paltry saving habits of Americans, many Boomers will have to scale back their spendthrift ways. A better question might be, “how much money will you have?” That will set the limits on the “post-career” lifestyle.

A good first step is to write down all the sources of income you’ll have. How much will you receive in social security? Are you one of the fortunate few with a pension? How much will you have in various retirement accounts like IRAs and 401(k) plans? What about other savings or assets that will produce a stream of income? Once you get all this down, you begin to see how much you’ll have to live on.

When you see the numbers in black and white, it may help determine whether you really can step down from your main line career. Or, maybe you will see that part-time work bringing in $20,000 a year will be just fine. And remember, inflation will keep chewing into your income, like little Pac Men who never get full. Social security is indexed to rise with inflation; most pensions are not.

So, how far will those retirement accounts and other pockets of loot carry you? Here is a calculation that shows what you can wring out of your war chest.

Let’s say you want to draw upon your savings over a 30 year period. You assume you can get a 6 per cent rate of return on your nest egg, and you want annual withdrawals to grow by an estimated inflation rate of 3 per cent.

Assuming these parameters, for every $100,000 you have in savings you can withdraw $4,900 at the beginning of year one. Each year’s payment will rise by 3 per cent to maintain your purchasing power. The balance of your account will keep growing at an average annual rate of 6 per cent. Because of inflation, payment number 30 will be $11,550. After that you’ll be flat broke.

Again, the $4,900 is for each $100,000 in savings. If you have half-a-million, the year one pay-out is 5 times $4,900, or $24,500. If you live less than 30 years your heirs will no doubt figure out what to do with leftover cash. If you live more than 30 years, you’ll have to get creative with Hamburger Helper. Hey, do they still make that stuff?

(For more on crunching numbers to fit your own circumstances go the the archives and check out the March 5, 2005 posting: Free Calculator Helps You Plan.)


How many eggs in your nest?