Written by Hi, it’s Dre Griggs with Obsidian Wisdom. Today we discuss how much money you need to have invested for retirement. You’ll see that this number varies depending on the stream of income you’re using. There are seven streams of income that the IRS recognizes, and six of them are relevant for retirement. The seventh one, earned active income, doesn’t apply if you’re retired.
Depending on the type of income stream you choose, the amount of money you need to have invested will differ. Some streams allow you to leverage your money, requiring less investment to get more out, while others are safer but offer smaller returns. We’ll go through each of these streams so you can understand how much money you’ll need.
Average and Median Retirement Income
Currently, the average retiree lives on about $80,000 per year, while the median income for retirees is closer to $50,000 per year. I’ll show you the amount you need to have invested based on both the median and average income.
Investment Income
Investment income, often referred to as dividend income, is received through investments in the stock market. You invest in companies, usually large blue-chip companies, and they give you a portion of their profits as dividends.
The average dividend yield is around 3%. To have $100,000 per year in dividend income with a 3% yield, you need to invest $3.3 million. However, if you can find investments with a 10% yield, you only need $1 million to generate the same income. The key is to balance yield and sustainability, ensuring the companies you invest in can maintain their dividend payouts.
For a $50,000 annual income, you would need $1.6 million invested at a 3% yield or $500,000 at a 10% yield.
Interest Income
Interest income is considered a relatively safe investment. You loan your money to a company or the government, and they pay you interest. As of June 5, 2024, the 10-year treasury rate was around 4.41%, and the composite rate for bonds was 4.28%.
With an average interest income rate of 4%, you would need $2.5 million to generate $100,000 per year. This includes income from annuities and pensions, which are fixed and relatively safe investments.
For example, at age 60, you might need $1.3 to $1.5 million in an annuity to generate $100,000 per year, with a payout rate of 6-7%. At age 65, you would need $1.1 to $1.3 million, with a payout rate of 7-9%. At age 70, you would need $900,000 to $1.1 million, with a payout rate of 9-11%.
Rental Income
Rental income typically comes from real estate. The 1% rule suggests that a property should generate rental income equal to 1% of its value each month. For a $100,000 property, you should receive $1,000 per month in rent.
If you’re netting $1,000 per month per property, you would need 9-10 properties to generate $100,000 per year. For $50,000 per year, you would need 4-5 properties. If you’re netting $500 per month, you would need 16-17 properties for $100,000 per year and 8-9 properties for $50,000 per year.
For a simpler approach, consider investing in Real Estate Investment Trusts (REITs), which allow you to earn rental income without managing properties directly.
Capital Gains
Capital gains are profits from selling investments held for at least a year and a day, taxed at a lower rate than regular income. Using a 4% withdrawal rate, you would need $2.5 million to generate $100,000 per year. A 5% withdrawal rate would require $2 million for the same income.
For $50,000 per year, you would need $1.3 million at a 4% rate or $1 million at a 5% rate.
Profits from a Business
Investing in or starting a business can provide significant income. Unlike stocks, businesses can often be bought for a multiple of their annual revenue, providing leverage. For example, a business generating $100,000 per year might be bought for $300,000 to $400,000.
While this approach can offer high returns, it also comes with risks, such as potential liabilities and the need for active management.
Royalty Income
Royalty income can come from books, courses, or other intellectual property. Depending on your product’s price and sales volume, you can generate significant income. For example, selling 10,000 copies of a $10 book would generate $100,000 per year. A $1,000 course would require only 100 sales per year for the same income.
Choosing the right approach depends on your interests and skills. Whether it’s a book, course, or membership site, you can create a steady income stream by leveraging your expertise.
Conclusion
When it comes to answering the question of how much you need to have invested for retirement, it depends on your chosen income streams. Wisdom is key to making sound retirement planning decisions, considering your risk tolerance, timeline, goals, and core values.
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