Wednesday, May 2, 2012

Determining a Retirement Amount

In today's world of fiat money, it is hard to know how much you need to retire.  Life expectancy is a guess and health costs are skyrocketing.  There are a lot of other variables.  Of course, the biggest variable and the biggest threat to your retirement is the debasement of money.

If you lived in the late 1800's in America, you could save your money without investing it and you could be reasonably certain that it would hold its value.  When money is backed by gold, the only inflation you have to worry about is from gold miners.

So what is the best way to determine a good retirement target amount?  You can't say that you need a million dollars, because the target is moving.  By the time you reach that goal, one million dollars may not buy you that much.

There is the option of measuring it in gold.  You could say that you need 500 or 1,000 ounces of gold to be wealthy enough to retire.  The problem here is that gold is not the everyday money that we use in today's society.  In the year 2000, 1,000 ounces of gold would have been worth just $300,000 at 300 dollars per ounce.  Today, with gold near 1,700 dollars per ounce, 1,000 ounces would be worth 1.7 million dollars.  While prices have risen in the last 12 years, they have not gone up by a factor of 5 or 6.  This illustrates that measuring your wealth just in weight of gold is not a good measurement.

You could set your target in dollars and then adjust it each year according to the CPI, but then you would be relying on government statistics, which may understate the actual inflation rate.

As I have written before, I think using real estate may be the best measure for wealth accumulation and for a target retirement number.  If you own 10 properties free and clear (no mortgage) and each one is worth $100,000, then your net worth in properties is a million dollars.  But let's estimate rental income, instead of worrying about the value of each property.  Let's say that you could rent out each place for $1,000 per month.  But you still have expenses for HOA fees, property taxes, insurance, repairs, and other administrative costs.  Let's say these add up to $500 per month (which is probably on the high side in most areas).  You net $500 per property per month, times ten properties.  That is $5,000 per month or $60,000 per year.  If you can live on $60,000 per year right now, then this is a good target number.

So why do I like using real estate?  The reason is because rents don't fluctuate much.  It is not like the price of gold where futures markets are driving prices up and down on a daily basis.  Rents are more stable.  However, rents do tend to keep up with inflation over time, so it relieves some of the anxiety over central banks creating money out of thin air.

This is not a perfect measurement, but I don't think you can come up with anything perfect in today's world.  Perhaps it could be some combination of dollars and gold.  If anyone else has any suggestions on this topic, I would be glad to hear them.

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