Retirement is pretty complicated. While it seems like a simple task to save money for a long time, so you can live off it for a short time; this is a wild oversimplification. As a result, it is difficult to put a single figure on what it will take to retire comfortably. So, we are going to break it down a couple different ways.
The first will be those who want the most secure and conservative retirement through municipal bonds. Second, those who are willing to use retirement or index funds. The more conservative option you choose, the more money you will need to save. Disclaimer: Regardless of the route you choose, you should always be contributing your maximum employer match to an IRA/401(K). It’s free money.
Municipal Bonds: Safe but Slow
This is by far the most conservative way of doing things, but it takes the most money as a result. In addition to your employer match contributions to your retirement fund, most of your savings will take the form of municipal bonds. These are bonds sold by the government, and they guarantee a small return on your money. Not only is the return guaranteed, the gains are also tax-free.
The length of these payouts vary, but you can usually find 5% returns on bonds of about 6 months in length; that is what we will use to measure. So, if you contribute everything you save to municipal bonds, you can land a 10.25% return on the year for your money. So, all you have to do is calculate that growth over time.
Your goal is to save up enough to make a “salary” in interest. So, your yearly take from municipal bonds will be around 10% of whatever you commit to the bonds each year (assuming the average of 5% over 6 months). So, if you want to make $60,000 as your retirement “salary,” you will need to save $600,000 of cash assets to commit to these bonds by the time you retire.
Stock Market Accounts: More Risk, More Reward(?)
This is sort of a blanket category including 401(K)s, IRAs, index funds, and mutual funds. These can be more lucrative than municipal bonds, but are also a little bit riskier. With stock accounts, your average yearly return is 7-8%. Now, you may be asking yourself, “Why would I take on more risk if the yearly take is less than municipal bonds?” There are a few reasons why stocks are often more profitable:
- While gains from municipal bonds aren’t taxed, the income with which you buy them is. With retirement accounts, your money is shielded from the IRS and goes straight into the account. If you don’t pull the money out before retirement age, you will also not have the gains taxed. So, you end up with a lot more money than you would with the more conservative route.
- Municipal bonds are straightforward. You buy a bond with a certain promised return, and at the end of the term you get that return (as long as the issuer doesn’t default). With stock accounts, you have the ability to take full control of your money and invest it how you wish. Some people are able to elevate their gains to 10-11% on the year pretty consistently by taking manual control of their money.
- Once you buy a municipal bond, that money is tied up until the term ends, and you receive payment. With stock accounts, you can pull out any amount of the money at any time in the case of an emergency. Now, this does mean it gets taxed as ordinary income if you take it out before your retirement, but it is still nice to have the ability to liquidate when the need arises.
So What Will I Need?
For obvious reasons, it is hard to put a dollar figure on what you will need using the stock strategy. Your gains will depend on your savvy (or that of whoever handles your funds), as well as market fluctuations. Odds are, though, it will end up taking less money to retire comfortably this way.
While the cost is a little more of a headache, it is often worth it. Your choice should fit what is best for you, just keep in mind the pros and cons. Happy saving!
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