How much do you need to make in real estate investing to be able to cover your living expenses for Retire Comfortably?
If you have been in one of my classes, then you might have heard me talk about my grandfather. He was actively investing well into his 90’s. I plan to follow his example; I don’t ever want to retire. In fact, I believe that those people who officially retire end up shortening their life expectancy because they may have a reduced sense-of-purpose to their life.
For this exercise, I’m using the word “retire” as the time in your life when you may want to stop doing any further active investing. Your passive investments will continue, but you will also be using these assets to pay for your living expenses. There is some simple math that we will do to get a rough estimate. Ask yourself the following questions:
- In how many years do you want to retire?
- How long do you expect to live after you retire?
- Once you retire, how much do you need to live each year? Use an amount in today’s dollars.
- What do you think will be the average inflation rate leading up to your retirement? The average for the last few decades has been about 3%. Put this number in hundredths and add a “one” in front. For example, 1.03 is the same as 3%.
- Next, convert today’s dollars into future retirement dollars with the formula CD. Or, if you do not have a calculator that can do exponents, then just multiply D for C times.
- Then find out what amount you will need for your first year of retirement in future dollars by doing this: C x E
- Finally, find out how much you need for your full retirement: F x B
- What is your net worth now? Include liquid and non-liquid assets. Do not include the house you live in now and any of its related debt.
- To be able to skate through your retirement years, how much do you need to grow your net worth before you retire? The formula for this is G – H.
This exercise assumes that once you retire, you will be able to passively grow your net worth at or above the rate of inflation.
Now, let’s do an example together. Joe Investor is 30-years old and has a net worth of $500,000 now. He wants to be an active investor until he is 50. At that time he wants to be able to draw on his assets at a rate of $80,000 a year (in today’s dollars). Joe hopes to live to be 100-years old. Here is his information:
- 20 years (How long until you retire)
- 50 years (How long do you expect to live after you retire?)
- $80,000 (This is the amount, in today’s dollars, that Joe wants to be able to spend when he retires in 20 years)
- 1.05 (Joe is pessimistic about the future economy in the country)
- Joe doesn’t have a calculator with an exponent key. So, he does this math: 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 = 2.65 (In other words, Joe believes that in 20 years it will take $2.65 to buy something that is worth $1.00 today.)
- $80,000 x $2.65 = $212,000
- $212,000 x 50 = $10,600,000
- $10,600,000 – $500,000 = $10,100,000
To be safe, Joe knows that he needs to grow his net worth by about $10 million. And, more than that if he wants to leave something for his heirs.
Joe could look at it another way. He needs to create some long-term, income-producing real estate investments that will passively create the funds each year on which he can live. And, he needs to be educated enough to set these investments up so that the income grows at (or above) the prevailing rate of inflation each year. I wonder if he is scheduled to take Income Properties, Lease Options, Mobile Homes, and Commercial Real Estate trainings?
- Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.