How large a portfolio will you need to provide an income that starts at say, $60,000 per year and gradually escalates? That depends on various assumptions you make. How much will you be able to invest each year and how rapidly will your investments grow? If you prefer to be conservative you might project returns of 8% pretax and 6% aftertax from a mixed portfolio of stocks and bonds. You need to be very prudent because you won’t earn a steady 8% each year.
You’ll have some ups and downs, over the course of your retirement; a sharp market correction in the early years of your retirement may have an adverse impact on your entire plan.
Generally, you should not project investment returns over 10% per year. Such projections might seem to be on the mild side, with the S&P 500 up 21% per year since 1990, but longer-term annual returns to stocks are 12.4% for the past 35 years, according to Ibbotson Associates, Chicago, and 11.3% for the 74 years since 1925. If you hold bonds in your retirement portfolio, overall returns are not likely to reach 11% or 12%.
