Is retirement really THIS bleak?
In a recent column, you may recall, I argued that retirees are caught on a treadmill fueled by low interest rates. On the one hand those low rates are crucial to keeping the stock bull market going, but on the other hand those rates mean that your portfolio dollars don’t go as far as they did previously. In short, retirees are having to run faster just to stay even.Gloomy as this was, it was nothing compared with the picture painted by the popular Financial Samurai blog.
The chart reports the yearly payment level assuming either no inflation adjustment or what it would be in the first year if, in each subsequent year, it was 3% higher. Notice that in no event is the annuity’s annual payout less than $40,000.Why did the Financial Samurai conclude that you need so much money to retire on $40,000 a year? The author derived it from the annual income you would earn if you took your entire retirement portfolio and purchased a 10-year Treasury.
Another reason the Financial Samurai analysis is too pessimistic: Annuity rates are more correlated with the corporate bond yield than the Treasury yield, as I showed in the chart that accompanied my recent column. Though the corporate bond yield has been coming down in recent years, it is still larger than the Treasury yield.
So the analysis presented here is the minimum. To the extent you are able to do better, of course, then you would need less than $1,000,000 to fund a retirement income of $40,000 annually.
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