Monday, 20 May 2013

Retirement - Making my own Pension Plan

Following yesterday's post I'd like to address the monitory side of a readers comment.

"Keep in mind that the earlier you retire the more you have to save because you'll have a larger number of retired years to budget for. There's always the option of semi-retirement - getting a low stress part-time job where you get out of the house, have that social time and financial reward but leave behind the stress of a full-time career. Just something to think on.. "

Actually I will need the same amount of money no matter when I retire.  Allow me to explain.  

When I was in the military life was pretty sweet.  I had a defined benefits pension plan which guaranteed a certain sum every year until you died based on how much you earned just before retirement and number of years of service.  It was even indexed with inflation.  The pension plan would only fail if the government collapsed, which is unlikely.  

Upon leaving the military I knew that the chance of seeing a pension was remote which led me to the conclusion, I needed to make my own pension plan.  I need a pot of money that will sit in investments and allow me to live of the interest while never touching the principal.  It is generally accepted that 4% is a safe withdrawal rate, you can read why here.  

If, as I planned in my Early Retirement post I saved $700,000 on top of a paid off house I could safely withdraw $28,000 per year or $2,333 per month with out ever touching the principal.  The real kicker is that my current cost of living is roughly $1,440 per month.  So if I save $700,000 before retirement I could do any of the following:

a) live it up and spend an extra thousand dollars a month (unlikely)
b) take care of a lot of kids during my retirement (very likely)
c) watch my net worth grow ever month as I live on only a portion of the interest (very likely)

It will probably end up being a combination of b and c.  Oh, and for those of you who are wondering, $432,000 is enough to generate $1,440 per month of interest.  Personally I like the flexibility that my very big safety margin gives me.  

Have a question?  I'd love to hear it!

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