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The Nest Egg

Ah, the nest egg. After reading about so many retirees finding out, too late, that their 'nest egg' isn't adequate enough for what they need in retirement, I wanted to include my thoughts on the nest egg subject here.  I was frustrated before and after retiring when I tried to determine how much a really need for retirement.  Everywhere I looked, they talk around the subject but never give you a formula to figure what the right amount is.  Well, while I'm not sure if there is a "right amount".  The more I learn and experience, the less I think I understand.  However, to start the dialogue off on a solid foot, figure that the nest egg needs to be around 25 to 30 times your annual spending (all your annual spending).  So, say you as a couple, spend $75,000 a year, and you believe 25 is a good multiplier, than your nest egg has to have $1.875 million in it.  Are you still breathing?

Where does the 25 or 30 come from?  Simple.  Make an assumption about how much you will earn annually off the funds in your nest egg.  Bear in mind that some of the funds will be in low interest bearing accounts at times, may be in investments that are going sideways, not up, and some may be lost due to investments that proved worthless.  So, with all that in mind, let's say you assume you can earn 4% on your funds annually.  Ok, take the 4% and divide it into 1 (1/.04 = 25), you get 25.  If you assume it's closer to 3%, say 3.33% to make this easy, than 1 divided by 3.33% (1/.0333 = 30) you get 30.  What we're saying here is that, if you accept the premise that you never want to dip into our nest egg, but rather live off whatever you can earn off the money, and you assume you can earn 4% a year, than you need $1.875 million to start with so your annual earning off the nest egg equal your annual spending, in this case, $75,000.

Call this the quick and dirty calculation.  Then there are a number of factors that will also have a significant impact on what you need in the nest egg when you retire.

  1. We've all known what can happen to the stock market, and the real estate market.  These are gross examples of the element of Risk.  Part of any nest egg can disappear in a flash.  Yes, any investment, whether stocks, bonds, or real estate can rebound. But during the time your nest egg is below the $1.875 million, to use the example above, your annual earnings are going to be below your annual spending (assuming you don't reduce what you spend).  Now your nest egg is getting smaller each year by the amount your spending exceeds your earnings.  As you can see, this can spiral downward.  This suggests you need to start out with more than the 25x formula mentioned above.
  2. This falls under "word to the wise"...I found out the hard way that I can not implicitly trust anyone to manage my rmoney, investing it in any particular vehicle, be it stocks, bonds, mortgage backed notes (private money lending), real estate..anything.  You have to take responsibility to stay on top of where your dollars are and that the details of the investment are, in fact, what you think they are. 
  3. I'll digress a minute to discuss investment managers.  There are exceptions, but, in general unless your net worth is over $10 million and most of that is with an investment manager, you are not going to get much personal attention on a continuous basis from any "Financial Planner", "Investment Manager" or what ever else they call themselves.  NEVER assume they are watching your account daily and will tell you to buy or sell because the stock, or the stock market, is making big moves up or down.  Think really hard before you allow any money to be placed with a money managed fund.  I learned the hard way that they will ride your whole portfolio right into the ground.  Such was the case in 2001 and 2002 as the market was on a steep down slope.  I'm told (didn't verify it) that money managed investment funds must have the vast majority of their clients money something.  So they literally will continue to keep it in stocks even though the overall market is in a steep decline.  So think twice.  In the case of money managed funds, one must be prepared to sell the fund and get their money out ahead of any major downward move in the indicies.
  4. What are the alternatives.  As for myself...I continue to make private money short term loans through a local finance company that, in my opinion, does a professional job of checking out each "deal".  Now, as mentioned above, I have been burned doing this, but, hope I have learned my lesson and have done sufficient due diligence to have trust in the current company.
  5. Speaking of due diligence, and this is my opinion again, always put in an adequate effert to check out the people that you are dealing with.  Ask for references and check them out. You can go on line too and do a background search on them
  6. While it may not be the only way to get a good investment manager, word of mouth may be the most reliable means.