Chapter 14 - Nest Egg

Where did the term nest egg come from? Seems a strange term for your estate value yet it carries a very real comparison. Though both are inherently strong in their structure, in the wrong circumstances both may be considered very fragile.

So you followed the rules as best you could. You maximized your savings and minimized your spending. You contributed to your retirement plan. What now? When do you have enough to quit working and enjoy your 'golden years'?

Those questions are difficult to answer and you may have found that there are few specific answers in the media. You can find all sorts of formulas and perhaps can even arrive at some comfortable amount of money that will meet your needs. But for how long? Will you be sentenced to live forever under the veil of fear that one day your money may be gone while you still aren't (gone).

Generally accepted rules suggest that after you reach fifty years of age that you should subtract your age from 100 and that portion of your nest egg should be invested in bonds and after keeping some cash for living expenses the balance is invested in stocks. A bit of a problem arises with this concept in our day because the rules that make the rules have changed and the rule may not be changing quite fast enough. Here's the problem. In all likelihood you will retire sooner and live longer than the generation ahead of you. Retirement for you may reasonably be measured in thirty to forty years.

That being said, taking your nest egg home and hiding it under the mattress is a sure fire way to be sure you outlive your money. I believe a best bet for your nest egg is to move your safety horizon way out. Keep your nest egg actively invested primarily in stocks as we discussed in the previous chapter well into your retirement. The stock market over any 10 year period out performs bonds on an order of double. When inflation is factored in, over the long haul bonds and cash may keep a steady stream of income flowing your way year after year but that steady flow of income will buy less and less with the passing of each year.

Nest eggs are tricky work. They take discipline, timing, research and responsibility. First and foremost protecting the principal is paramount. Yet protecting the principal while earning a livable and inflation protected return is equally important to give yourself the lifestyle you worked hard and saved for most of your life.

How much do you need to be comfortable while not working? Sorry, I don't know. There are too many variables. However, we can readily calculate a pretty good estimate. How much after tax income do you think you need to live the lifestyle you want? Don't forget to consider income taxes unless you are wholely invested in tax free bonds.

Take the income you will require and divide the amount by 5%. Five percent is a reasonably safe yield expectation on most investments. Understand that you will probably earn more, more like 10%, but that excess must be left in your investment account. The excess becomes a part of your capital protecting you against inflation. You will have more principal yielding 5% allowing your income to grow over the years as prices go up.

The calculation becomes very simple. For example assume income must be $25,000 your first year (of freedom). Divide $25,000 by 5% and the size of your next egg must be $500,000. Over time you will likely earn 10% and the balance you don't spend increases the $500,000 to $525,000 which next year allows $26,250 income. The third year your principal is $551,250 which allows $27,600 income. And so on. The magic is in allowing part of your return to be reinvested.

I am certain that you probably exhaled after reading the paragraph above and now despair of ever being able to not work. Slow down! Remember the $500,000 in the example is not necessarily simply your investments. Perhaps your home has a great deal of equity and moving to a less expensive place can yield resources that can be included in your principal. Remember to include you Social Security income in your income calculations, and don't forget to make a realistic income calculation based on your new freedom based lifestyle that probably will not require many of the fixed and variable expenses required while you are working.

Now we come to the end of the story. You now know everything you need to know to prepare yourself for a financially stress free life leading to a comfortable time when you do not have to work nor be dependent on anyone else.