In addition to owning your own business or rental properties, a nest egg of good investments is a great way to continue generating income in retirement -- and it may require the least amount of work from you.
But to get that nest egg large enough, you need to start investing early, keep your fees low, diversify your risks to protect your wealth, and avoid costly advisors. If you can do that, you’ll probably have enough money for retirement -- but how much money is enough?
Most experts agree that to figure out how much money you need to retire, you should take the income you want in retirement and multiply it by at least 20. Let’s say you earn $100,000 per year now and think you can live comfortably on $80,000. That’s a $1.6 million nest egg you’re aiming for.
That big pile of money is going to generate returns for you beyond the principal you’ve invested, year after year. We’re counting on 5% returns, which is lower than the stock market’s long-term historical average growth of 6%-8.5%. As long as you have a few decades left to live, the goal is to live off those returns.
The other way to guarantee an income in your retirement is to purchase an annuity with the proceeds from your retirement investments. Annuities come in three main forms: fixed, inflation-adjusted, and variable. You won’t want to exhaust your whole nest egg on an annuity, but if you know what you need to spend, having an annuity for your expenses can be a great way to make sure the money you need and want is there, leaving your pile of cash alone for when you have a real emergency.
A major downside of many annuities, if you are married, is that payments stop when you die. If you want to provide something for your spouse after your death, you have to look for an annuity with a survivor benefit. Those are, of course, going to be more expensive than annuities that come without one.
You’ll also need to see if the annuity offers a better return than just leaving your money in your retirement accounts. This can be a difficult thing for the layman to determine, as it involves calculating compound interest as well as projected returns. So while there’s a certain comfort to having the “sure thing” of an annuity, that certainty is something you pay for.
Beyond the topic of lifetime income, you need to think about financial end of life issues. Do you want to leave your family members an inheritance, or do you plan to spend down in your final years?
There are different methods of figuring out what you can withdraw every year without exhausting your resources to the point of “money death.” Once you answer that question you might find that there’s no need to keep generating large returns well into your retirement.