Oink oink, Piggies!
One of the biggest shifts that have occurred to the working man and woman over the past several decades is in the way retirement works in companies.
I grew up hearing from my father about how people would work in a factory or major corporation for 30-some years while getting paid, and then have a guaranteed pension after they retired, which they would then be able to live off of for the rest of their lives. Combined with Social Security, even “blue-collar” workers with a high school diploma could live comfortable lives through retirement, without really having to have thought about how to pay for retirement at all.
Those days…are gone.
There Are No More Pensions*
Unless you are a government worker of some kind (i.e. teacher, member of the military, politician, etc.), you probably do not and will not have a pension. What that means is this: when you retire, you’re on your own. You won’t receive any monthly checks from ABC Corp., and if you don’t have any savings, you’re pretty much out of luck. Who knows if Social Security will last very long, so I wouldn’t count on that (if you’re lucky enough that it’s there when you retire, think of it as “icing on the cake”). Basically, you and you alone are responsible for if you’re going to have any money when you’re old; your company is not. Even if you do have a pension, it might not be enough to give you the lifestyle you need or want in retirement. …And plenty of people will tell you that just because your employer said you’ll get a pension doesn’t mean that it will actually happen. Plenty of people have had their pensions just never happen or get taken away.
Make Your Own Pension.
A pension is essentially an amount of money paid out to you regularly by your former employer during retirement, after having worked for x number of years with the company. Let’s say you earned $4,000/month ($48,000/year pre-tax).
How much money would you have to have invested in order for it to ‘kick off’ $4,000/month pre-tax, without actually affecting the amount of money in your savings? This is actually pretty easy to figure out:
Savings Required = Yearly Income / Real Interest Rate (in decimals)
Let’s say we want to be conservative in what we predict we can get as far as a real interest rate: let’s say 4%. So, for our example above:
Savings Required = $48,000 / 0.04 = $1,200,000
So, we need to have $1.2 million invested and earning a 4% real interest rate for us to get $48,000 pre-tax in interest income per year.
How Much Do You Need?
Now, $48,000/year isn’t exactly “living large” in retirement. You won’t be going on too many extravagant vacations or sitting on very many beaches on that income. Let’s say you want to do a bit better. How’s $250,000/year sound? Great! Let’s run the numbers:
Savings Required = $250,000 / 0.04 = $6,250,000
$6.25 million invested at a 4% real interest rate is how much we need to have a $250,000/year income in retirement.
So how much do you need to have invested to make your own pension?