Is it even possible today to retire rich? The short answer is “yes.” We all know people who have done just that. Watching your neighbors Bob and Betty Rich live the good life well into their 90’s only tells you it’s possible, not whether you’re prepared to do it too. So let’s forget about the Riches and focus on you.
The first question you should ask yourself is: “Do I have enough money for the duration?” Or, if you’re still in your 40’s or 50’s: “Am I on track to save enough?”
You might not know, but there’s a straightforward way to find out. The simple formulas planners used to use to make retirement projections are now outdated, so Chief Analyst Andrey Dashkov built a Retirement Income Calculator you can download to run your own up-to-date, customized projections.
The second question is: “Do I have an investment strategy in place that will make my hard-earned wealth last?”
Your goal for each nonworking year should be to live off of the interest and never touch your principal. You may have to withdraw some capital periodically, but if your portfolio is healthy, that shouldn’t be the norm.
An Approach That Works in the Real World of 2014
For the generation before us, “100 minus your age” worked well. If you were 70 years old, then 70% of your portfolio went in safe, fixed-income investments; the remaining 30% was conservatively invested in the market. Many simply bought into an S&P 500 fund, and the market return and dividends did the trick. In round numbers, the S&P 500 historically averaged a 10% return. With 30% in the market, that would add 3% to one’s overall portfolio each year to combat inflation.
If you could live off the interest of the 70% and grow your balance by 3% on average, each year your nest egg would maintain its buying power. If the market tanked and you had 30% in the market, even if it dropped by 50%, the most you could lose was 15% of your overall portfolio.
