What Is the Rule of 20 in Bond Investing? - dummies

What Is the Rule of 20 in Bond Investing?

By Russell Wild

The nest egg goals you establish now have everything to do with how heavily you invest in bonds. Where does the multiplier of 20 come from in your investment strategy? It simply gives an approximation of how much you should have by age 65 to cover your yearly expenses, based on the current average lifespan (mid 80s). With 20 times your annual withdrawal needs, the chances are good that you won’t run out of money before you make your final exit.

Obviously, if you can save more, so much the better.

The number 20 may scare the heck out of you if you haven’t put much away so far, but try to remember that compound interest is a very, very powerful force.

If you are still the young age of 30, investing wisely in a diversified portfolio, you would likely have to put aside only about $250 a month to have a darned good chance of building a $600,000 nest egg by age 65. If you have a job where the employer matches your 401(k) contributions by kicking in 50 percent on top of whatever you put in, $167 a month would likely do the trick. Many readers are well over 30, but, still, you get the idea: Start saving today, and you can likely make great headway.

If you think that you are likely to live longer than the average lifespan, or if you’re planning to quit work before age 65, you should plan to save more than 20 times your annual living expenses. The longer you plan to live a life of ease, the more money you’ll need to tap.

Here’s another very rough rule: If you plan to live in retirement for 30 years, have 30 times your annual anticipated portfolio withdrawals; 40 years, 40 times, and so on.

For those who would like to keep working as long as they can, there’s still nothing whatsoever wrong with financial independence, so aim toward the same goal: Try to amass at least 20 times what you might need to live for a year (minus non-earned income).