A Retirement Dilemma

With many wondering how long Social Security will remain in place as we know it, more than ever the question, "How much money do I need to accumulate to retire?" is a common one with several "rules of thumb" as a potential answer.

One simple answer is to accumulate $100,000 in a retirement account for each $500 that you will need to live on each month. For example, you determine that you live on $2,500 a month and want to continue your current lifestyle in retirement. In that case, using this rule of thumb, you should accumulate $500,000.

($2,500 / $500 = 5 and $100,000 X 5 = $500,000)

The theory behind this is that a 6% return on the principal amount you have invested is a sustainable rate for a well-diversified portfolio. Under this method, you will never theoretically need to spend the principal invested, but only the money it produces. This is important because whether you live until you are age 67 or 107, you will not "run out of money" if only the earnings are spent. After all, you probably don't want to be trying to find a job at age 90 because your bank account is empty.

This meets another good question, namely, "How can I accumulate such an amount of money?"

Certainly, taking advantage of employer-provided retirement plans can help, such as a 401(k) account, as many will even match funds up to a certain percentage. Traditional and Roth IRAs are also available on a personal level. (All of these provide certain tax benefits as well.)

Large amounts can be accumulated, but keeping time on your side will make all of the difference. Although unconfirmed, Albert Einstein is credited by many sources with declaring that the power of compounding interest is the most powerful force in the universe.

To illustrate, consider these three scenarios:

(1.) It would take 30 years to accumulate $500,000 if a person invested about $498 per month and received a 6% return per year on the money they invested.

(2.) If the same scenario was put into place just five years later, and the person only had 25 years to invest, it would take setting aside over $721 per month.

(3.) If the person puts off investing for an additional five years, and there is only 20 years left to invest, it would take slightly over $1,082 per month to accumulate $500,000.

Please know there are certain negative arguments made about this rule-of-thumb of $100,000 invested for every $500 per month needed, especially those questioning sustainable rates of return and future inflation considerations; however, it seems to be a very simple one to set initial goals to. Once you're on-track to achieve this, those and other issues can be considered too.