We went home for the holidays, and a long-time family friend was lamenting about his retirement.  He thought he had the necessary cash assets, but was having to work more than he expected.  I’ve also had a number of entrepreneur friends mis-estimate the amount they need to “retire”.

Most advisers will give you a ~2% guideline for retirement income:   if you want a lifetime inflation-protected income stream, budget on taking out that amount annually (or aggressively, 3%).  You can’t extrapolate from current CD or T-bill yields:  $1m may get you $50k/year today, but (a) $50k will be worth a lot less 20 years from now, and (b) yields will vary year to year.

Some of the annual gains need to be allocated to increasing the principal to keep up with inflation.  Plus, you have to account for variability in annual returns, and paying taxes (realized cap gains, dividends, interest) on those re-invested gains.  When it’s all netted out, you end up in the 2-3% range for annual income.

(This all applies if you’re relatively young.  Older retirees may be taking out principal each year).