Introduction to Retirement Investing

For a briefer version of this article in .pdf format click here.

To help ensure a comfortable financial care-free retirement you need a large pile money. But how large of a pile? Here is an example. Suppose that after you include your Social Security and pension income (if you're fortunate enough to get a pension) you need an additional $20,000 for the first year of your retirement. This $20,000 will come out of your own retirement savings. And further assume that each year after that your expenses increase because of inflation. So the $20,000 requirement gets larger every year.

Also assume you will live for 30 years after you retire at 65. Finally, if you assume an average inflation rate of 4 percent and an average rate of return of 6% on your investment during retirement, you will need $436,000 at the start of your retirement. Given that all the assumptions hold you will have enough money to last 30 years.

Suppose your goal is to have $500,000 at the start of your retirement. So how do you get that amount of money? One way is to start investing at the earliest possible age. For example, if you start to invest 30 years before you retire and receive an average return of 6% on your investments, you need to invest $498 each month for 30 years, a total of $179,191. But if you wait until 10 years before your retirement, you must invest $3,051 each month or a total of $366,123. The conclusion is obvious - start saving and investing at the earliest possible age.

People who make systematic investments many years before they retire have time on their side to allow their investments to grow to very large amounts. But people who wait to invest until a few years before retirement have to play catch up and must invest very large amounts of money during their final years of working.

What does this simple example teach us? You need a very large pile of money for retirement and you should start saving and investing many years before you retire.

To learn more about retirement investing read the following topics:

Preparing for Retirement discusses:

Determining your retirement expenses.
Determining how much money you must accumulate before you retire.

All-In-One Retirement Calculator helps you determine how much money you need to save before you retire.

Retirement Calculator - Three Easy Steps gives you a simple three-step methodology you can use to determine how much money you must save to meet your retirement needs.

Getting To One Million Dollars for Retirement Takes Discipline shows how to accumulate one million dollars.

Target Nest Egg Calculator - Getting to $1,000,000 or More lets you see how much money you need to invest to grow your nest egg.

The Retired Investor's Dilemma - Should You Own Stocks, Bonds or Cash? discusses what you need to consider to determine your mix of stocks, bonds and cash.

Managing Your Retirement Portfolio discusses:

Understanding the effect of inflation.
How long will your money last?
Deciding what to sell.
Deciding what to buy.

Planning for the Distribution of Your Retirement Accounts is Essential lists three books that discuss the importance and details of properly distributing you retirement accounts.

Own Dividend-Paying Stocks In Your Retirement Portfolio includes 15 dividend-paying stocks that are appropriate for a retirement account. Many of these stocks have multiyear records of increasing their dividends, which is important to keep ahead of inflation.

Inflation and Purchasing Power Calculators

You can use the inflation calculator and the purchasing power calculator to help you study the impact inflation is likely to have on your finances. Suppose that you needed $60,000 for your first year of retirement. How much money would you need in 20 years to maintain the same purchasing power as today? The calculators will provide the answer.

Updated September 10, 2009.

Introduction to Retirement Investing

Introduction to Retirement Investing