A question many ponder is “what is the amount I need to retire?” Retirement may not mean one is not working at all, it could be that the work may not generate income for the individual.
Couple of prerequisites for “retirement” are
- To have come to an equilibrium with one life style and not having an urge to continually upgrade it.
- To have a clear idea of ones expenses – basically this should include the regular expenses to support day to day life, insurance expenses, expenses for holidays, gifts etc.
With prerequisites met, all one needs is the LEnS framework to plan for retirement.
- Ladder : Ladder provides for near term expenses, by keeping funds in a liquid form. Ladder is investing funds in fixed income products that are maturing on yearly schedule. Interest received from the products should give a decent protection against inflation. We suggest that 5 to 7 years of ones expenses are invested in a fixed income ladder. This way the funds are protected from fluctuations in the markets.
- Engine : Engine is to generate funds required to replenish the ladder on a yearly basis. You will need 10 to 12 times your expenses invested in a well-diversified equity portfolio or an Index fund. Markets have historically generated over 10%, so each year this will enable one to supplement the top rung of the ladder. The fact that market returns are typically well above the inflation rate helps protect the investment.
- Saftey net : Safety net is to provide additional security for unforeseen events. You will need 5 to 6 times your expenses invested in a well-diversified equity portfolio or an Index fund. If the Engine generates funds that are excess of that required to build top run of ladder then they can be added to the Safety net. If there is a short fall by the Engine to fund the top rung of the ladder then one can draw from the Safety net.
In summary you will need 20 to 25 times your current expenses to be ready to retire. These funds are best deployed in the LEnS framework.
We hope our LEnS gives you a perspective to review your readiness to retire.