Bitesize: How much should I invest so I can retire comfortably?

Alec: [00:00:07] Welcome to bitesize on Get Started Investing. In this series we feature some of our favourite lessons, quotes and moments from the podcast. If you'd like to listen to the full episode, we've included the link in the show notes. So the next one is around financial freedom and we know how much you love financial freedom and the fire movement. So I'll ask you this one. So if you're looking to retire and you have a retirement figure in mind or an idea of the annual income that you need to retire, how can you work out how much is required to invest into shares to potentially provide this return from dividends? 

Bryce: [00:00:47] Okay. So I guess if we use an example, it's pretty straightforward. So assuming that you want to retire with an income of $40,000 a year, you know that you're going to get a 4% return, generally speaking, from stocks, perhaps that's the return you're hoping to get from your stocks over a long period of time. So you're going to need income from a portfolio that's worth about $1 million. That is probably the simplest way to figure out what your stock portfolio value is. Then working back from there, I guess you just need to determine, well, to get to $1 million in terms of savings and compound growth, you need to work out how much you need to be putting away on a monthly or perhaps yearly basis, but remembering that your yearly return is not going to be guaranteed. So you're going to have to make some assumptions on that. But yeah, I mean, it's pretty straightforward to if, you know, you want to be living on X amount per year and you're assuming that you're going to generate a percentage return, you can figure out what sort of portfolio value you need for that.

Alec: [00:01:53] Yeah, I think the only thing to add is that dividends aren't guaranteed. So if you are actually retiring, you might want to look at something like bonds or annuities where the income stream is guaranteed. I mean, we saw with the big four banks, they all cut their dividends recently and the dividend payout ratio probably stayed relatively the same. But it's just the share price dropped, their earnings dropped and they cut their dividend. So if you are retired and you have that million dollars and you expect to get 4%, what you don't want is the share price of those shares to drop and then you only have $800,000 and you're getting 4% still. So, you know, you don't have to rely on dividends. Obviously, in this low interest rate environment, some of those other streams don't pay out as much as you would want, but that might mean you just need to work a little bit longer and save a little bit harder.Just to have that margin of safety. 

Bryce: [00:02:51] If you enjoyed that bite size, you'll find a link to the full episode in the show notes.