How much money do you need to retire comfortably? It’s not a bad question to ask as a starting point for your retirement planning. But it might not be the best or only question to ask. It’s just as fruitful to ask the question in reverse, starting with how much retirement income you’ll need, and then determining how much savings will be required to produce it.
With that as the backdrop, just for a bit of perspective on the matter, here’s a loose estimate of how much annual income half a million bucks can generate when the time comes.
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It’s a clichéd qualification, but yes, the number in question “depends.” It depends on what you’re willing and able to manage in retirement. Chief among these contingencies is how you’re going to invest your savings to produce this income. Bonds? Or stocks? Or maybe even something else?
If you’re attracted to the safety (and tax benefits) of government-backed bonds, right now 20-year Treasuries are yielding right around 4.6%. Investing $500,000 in nothing but these debt instruments would produce $23,000 in yearly income. Just bear in mind there’s no capital appreciation in bond ownership. Barring the slight ebb and flow that bond prices experience when interest rates also ebb and flow, your principal will be about the same amount you initially invest no matter when you decide to sell these bonds.
The alternative is dividend stocks, of course. While yields on dividend stocks can vary widely, presuming you’re looking to diversify your portfolio, you’ll likely plug into a yield like the Vanguard High Dividend Yield ETF‘s (NYSEMKT: VYM) current dividend yield of just over 2.3%, or maybe the Schwab U.S. Dividend Equity ETF‘s (NYSEMKT: SCHD) trailing yield of 3.5%. A half-a-million-dollar position in those funds will produce $11,500 and $17,500 worth of yearly dividend income, respectively.
That’s clearly less than you’d be getting from most longer bonds. However, it shouldn’t take too long for either income stream to leapfrog bonds’ annual cash flow. The Vanguard High Dividend Yield ETF’s annual payout has grown by 20% over the course of the past five tumultuous years, while the Schwab fund’s has improved to the tune of 55% during the same five-year stretch. That’s an annualized growth rate of more than 9%, easily outpacing inflation.
