“How much money do I need to retire?” Mr. H asked me this question on a podcast.
I say “Mr. H” not because I am hiding his identity, but because I forget which podcast I was on when I was asked this.
Mr. H was about 35 or 40 years old, married, and had some kids. He had his own podcast, did some consulting, and seemed to enjoy his life.
My reply: “You seem pretty happy with your life. You live in Kansas City. Maybe you spend $10,000 a month or $120,000 a year.”
“That’s about right,” he said. And Mr. H has a nice house.
Nice car. Takes vacations.
Kids go to nice schools.
“Are you happy with your lifestyle? You don’t want a bigger house, you don’t want to buy more expensive clothes?”
“I love my life.”
“So what else would you even want in life? Do you want to own a football team? Do you want to own art? Or a fancy car?”
“NO!” he said. “I like my car, I don’t want to own any art and I have zero interest in owning a football team.”
“Well,” I said, “If you had a billion dollars, what other way would you amp up your lifestyle?” “Maybe I’d buy a boat.”
In order to determine how much money Mr. H needed to retire, we needed to figure out exactly how much money he needs in the bank to maintain his lifestyle and never have to work.
As you could imagine, I advised Mr. H to get involved in investing.
To discover your magic number for retirement, first assume the most conservative number about what you can make from investments each year. I like to use 4%.
This month, I’ll discuss a surefire way to reach that 4%… and then leave you with some quick advice.
Closed-End Funds Can Provide Financial Security
I briefly discussed closed-end fund investing in last month’s issue.
To review, closed-end funds are mutual funds that trade like stocks.
A closed-end fund’s value is determined by the stock market — not by the value of all the stocks and bonds included in the fund.
As such, the value of a closed-end fund might be VERY DIFFERENT than the value of all of its assets added up.
In fact, some closed-end funds trade at significant discounts to all of their assets added up.
Most importantly, they are a way to buy a diversified portfolio of tax-free municipal bonds and get a dividend of usually 5-10%. Which is why 4% is conservative.
Thanks to that healthy dividend, it’s one of my favorite strategies.
Let’s go back to the Mr. H example. He spends $120,000 per year on this lifestyle.
So he needs $120,000 / 4% to keep his current lifestyle forever.
That’s $3 million on the dot. And although he might make more than 4% per year from closed-end fund investing, with 4% per year he’ll make $120,000 after taxes.
Of course, when you’re talking about forever… you need to talk about inflation.
Factoring in Inflation
First, who says Mr. H has to stop at $3 million? Why let your kids inherit all your money and then hand it over to Wall Street advisers?
You’re not going to die any time soon. Lifespans are longer than ever, and your children will be in their 50s or 60s before you die.
Second, inflation isn’t really the issue right now.
Many things are deflating:
• Computing power
• Cars have not gone up versus inflation
• Energy prices are going to deflate as cheaper oil or cheaper renewables becomes more prevalent
• Healthcare will get cheaper with genomics
• Basic products will get cheaper with AI and automation
Reduce Your Spend
Of course, an even better way to prepare for your retirement is to change your financial lifestyle. Even just a little bit.
You can reduce your financial footprint in a variety of ways.
Many developing countries have considerably cheaper prices than the U.S.: Portugal, Panama, even India. You can live for 1/2 to 1/10 the price you do now.
You can work remotely and make some side income to supplement. You can also assume you’re going to spend down to zero during the course of your lifetime. Then you may need much less.
I’m not saying it’s easy to make $3 million — even with investing. But often people think they need much, much more “to be happy.” This is never the truth.
That said, make that first million, then two. Then maybe you are already “retired.” If you can make 6% on your money rather than 4% then you are retired.
And that leads me to an explosive new investment from a growing trend…
