This is the first of a series of 9 posts that go in depth into various scenarios and options relating to preparing for retirement and determining what returns are needed to reach a financial goal in the future.
Being investors, we generally maintain a collection of properties that would be good investment opportunities for people looking to lend out their money, secured to real estate, and receive a return far higher than banks offer on their deposit accounts. Conversations with those people generally go something like this "I have a property that I could borrow against. You have money you're interested in lending against my property. What kind of rate would you want on such a loan?""As high as I can get."That's an understandable desire, what investor doesn't want to get as high a return on their investment as they can get?This response, however, might be an indication that they don't know what they need... so what follows is a potential scenario that gets at this question.
Without knowing what you need, it's impossible to devise a plan to get what you need. If you hit a target you don't know you have, that's just blind luck; do you want to pin your hopes and dreams on luck?Or do you want to be deliberate and plan for your own future?
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 estimate that with Social Security, a pension from John's company, and the savings from not having a mortgage payment anymore, they will need an income of $70,000 per year from their savings during their retirement years. Ideally, they'd like to live off interest and not dig into their savings at all.
If John and Jane can earn 8% on their money, how much will their savings have to be to yield them $70,000 per year in interest payments?
The Smiths need to earn $70,000 from some amount of money (call it $NEEDED) invested at 8%.
So $NEEDED x 8% = $70,000.
Dividing both sides of this equation by 8%, we get:
($NEEDED x 8%)/ 8% = $70,000 / 8%
$NEEDED = $70,000 / 8%
So $NEEDED = $875,000
So the Smiths need to have $875,000 invested at 8% in order to get $70,000 in interest income every year.