See all of the Money Blog entries in this series.

THE SCENARIO

John and Jane Smith are 53 years old, and hope to retire at 65.  They have $250,000 currently sitting in a bond fund, earning them 2.8% per year.  Their house will be paid off in 12 years, which will free up their current $1,330 mortgage payment (but not the taxes and insurance that they pay each month for their house).  Of the $191,000 they originally borrowed, they still owe $97,500.  (7% borrowing rate)

They’ve calculated that they’ll need $875,000 in investments to retire after 12 years.  Evaluating a variety of options, here’s what the Smiths have discovered.


THE SOLUTIONS

  • If they invest their $250,000 for 12 years, they need to earn 10.49% on their money.
  • If they invest their $250,000 for 12 years, and add $250 per month, they need to earn 9.8% on their money.
  • If they invest their $250,000 at 2.8% for 2 years, then at 18% for 1 year, they need to earn 11.37% for the remaining 9 years.
  • If they invest their $250,000 at 2.8% for 2 years, then at 18% for 1 year, they need to earn 10.41% for the remaining 9 years, if they add $250 per month to their investment.
  • If they paid off their house immediately and invested the remaining $152,500 and $1,330 per month, they need to earn 10.06% on their money.
  • If they paid off their house immediately and invested the remaining $152,500 and $1,330 plus an additional $250 per month, they need to earn 9.25% on their money.
  • If they refinanced their house, kept the payment the same but borrowed additional money, and invested the resulting $338,544.55 for 12 years, they need to earn 8.36% on their money.
  • If they refinanced their house, kept the payment the same but borrowed additional money, and invested the resulting $338,544.55, plus an additional $250, per month for 12 years, they need to earn 7.80% on their money.
  • If they refinanced their house, kept the balance the same, and invested the payment difference of $633 per month for 12 years, they need to earn 9.02% on their money.
  • If they refinanced their house, kept the balance the same, and invested the payment difference of $633, plus an additional $250, per month for 12 years, they need to earn 8.38% on their money.

Here’s a chart that summarizes these results:

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Money Blog – What yield do I need? Summary
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