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ETF Portfolio: How Much You Need in Your Portfolio to Retire

Whether you hold ETFs or mutual funds or individual stocks, you probably wouldn’t mind if your investments could support you. But how much do you need in order for your investments to support you?

That’s actually not very complicated and has been very well studied: You need at least 20 times whatever amount you expect to withdraw each year from your portfolio, assuming you want that portfolio to have a good chance of surviving at least 20 to 25 years.

That is, if you need $30,000 a year — in addition to Social Security and any other income — to live on, you should ideally have $600,000 in your portfolio when you retire, assuming you retire in your mid-60s. You can have less, but you may wind up eating into principal if the market tumbles — in which case you should be prepared to live on less, or get a part-time job.

Factor in the value or partial value of your home only if it is paid up and if you foresee a day when you can downsize.

The rationale behind the 20x Rule is this: It allows you to withdraw 5 percent from your portfolio the first year, and then adjust that amount upward each year to keep up with inflation. The studies show that a well-diversified portfolio from which you take such withdrawals has a good chance of lasting at least 20 years, which is how long you may need the cash flow if you retire in your 60s and live to your mid-80s.

If you think you might live beyond your mid-80s, or if you want to retire prior to your mid-60s, then having more than 20 times your anticipated expenses would be an excellent idea. It would also be an excellent idea to limit your initial withdrawal, if you can, to 4 percent a year, just in case you live a long life.

In truth, you’ll be on much more solid ground if you have 25 times your anticipated expenses in your portfolio before you retire at any age. But for many Americans who haven’t seen a real pay increase in years, this is indeed a lofty goal. For that reason, go with 20 times but be prepared to tighten your belt if you need to.

If you are still far away from that 20 times mark, and you are not in debt, and your income is secure, and you are not burning out at work, and you have enough cash to live on for six months, then with the rest of your loot, you might tilt toward a riskier ETF portfolio (mostly stock ETFs). You need the return.

If you have your 20 times (or better yet, 25 times) annual cash needs already locked up or close to it, and you’re thinking of giving up your day job soon, you should probably tilt toward a less risky ETF portfolio (more bond ETFs).

After all, you have more to lose than you have to gain. You do need to be careful, however, that your investments keep up with inflation. Savings accounts are unlikely to do that.

If you have way more than 25 times annual expenses, congratulations! You have many options, and how much risk you take will be a decision that’s unrelated to your material needs. You may, for example, want to leave behind a grand legacy, in which case you might shoot for higher returns.

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