Tuesday, August 28, 2007

Sufficient for 100 years

Some people thought that I must be very rich to have sufficient money to last 100 years. This is not really the case. It depends on how much you need to live comfortably.

If you have a house that is fully paid for, and your children are working, you will find $1,000 a month to be sufficient for 1 person or $1,500 for a couple.

If you can earn 4% per annum, a capital sum of $450,000 can give $1,500 a month forever. The money will not run out. It can last for more than 100 years.

A capital sum of $300,000 can provide $1,000 a month forever.

The problem is: $1,500 may drop in value year by year, due to inflation.

Here is how you can deal with inflation. You have a larger capital sum of, say $900,000. If you can earn 4% a year, you can draw out $1,500 a month, and this amount can increase yearly at the rate of about 2% per annum. This should be sufficient to keep pace with inflation, and preserve the real value of your monthly income.

This is how the participating annuity plan works. It pays a smaller sum (compared to a non-participating plan) and pays a bonus each year to keep up with inflation.

You can earn an average of more than 4% per annum, if you invest in a large, well diversified low cost fund that is mainly invested in equities. Read this FAQ.

In summary:

1. You only need a capital sum of $900,000 to provide a monthly income forever.
2. This allows you to draw a monthly sum of $1,500 increasing by 2% yearly,

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