Last time, we looked at dealing with inflation before we retire (a.k.a. Life After Work), to see that $40k a year of current needs means that you need to be able to generate somewhere between $100k and $125k per year, IF you want to retire in 30 years.
Even if we manage to build up the $2.8 million nest egg that Pinyo talks about (or the $1.8 million one that the following reader talks about), we have a problem, illustrated by the comment by Elaine on Pinyo’s post:
I don’t see interest included in the calculations here. Even at 4%, *just the annual interest* on 1.8 million will cover your annual needs. Not that that’s a bad thing, you’ll still have 1.8 mil left when you die. If you plan to use up all your money in retirement the necessary amount would be quite a bit lower.
Elaine has ‘forgotten’ about inflation; this doesn’t stop just because you retire!
You earn 4% on your money and before you get to spend any of it, Mr Inflation ’spends’ 3.5% for you … I asked Elaine if she can live off just 0.5% of $1.8 Million?
When you retire, if you have your money just sitting in the bank, inflation will simply kill you, financially-speaking.
On the other hand, if Elaine buys a $1.8 mill. rental property (paying 100% cash, forgetting closing costs) the property will increase in value WITH inflation, as will the rents … an inflation-proof retirement (or, she can buy TIPS, inflation-protected government bonds … etc., etc.)