The formula for retirement income is very simple. First, you figure out the expenses you will need to cover. Second, you figure out how much you can save in retirement plans. Finally, you have to determine a reasonable growth rate for your investments. That number is based on two things. First, it is based on risk level. Second, it is based on common sense.
You have to know that no matter how high your risk level is, you can't bet on high returns year in and year out all of the way to retirement. What if you take too much risk and pay the price versus getting rewarded? It is important to be conservative with your assumptions. If you blow them out of the water, that is great. However, if things don't go as expected with the annual growth of your investments, at least you were conservative and didn't experience such a big setback.
Financial Guru Dave Ramsey claims that you should be able to earn 12% a year using mutual funds and live off of 10% year in and year out.
That might be some of the more aggressive/irresponsible advice given by someone with his influence. I would like to think investors would see the other side of that advice.
Could 12% a year happen using mutual funds? I would suggest that the stars would have to line up for that to happen. The probabilities of it happening are so low that it wouldn't be worth trying. It would be like sitting at a roulette wheel and putting all your retirement money on one bet. There is some degree of luck when it comes to investing. What Dave is suggesting might have smaller odds than winning the lottery.
Use common sense and be smart about your assumptions. You worked too hard to build that nest egg!
Check out Bob's teaching videos at www.youtube.com/user/prudentmoney to learn more about intentional financial stewardship.
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