Retirement Planning: A $1.85M Question

As our children approach the age of 18, my wife and I find ourselves contemplating a significant life change: retirement. With a nest egg of $1.85M, we're wondering if we'll be ready to retire when the kids turn 18. The question is complex, and the answer depends on various factors, including our income needs, risk tolerance, and investment strategy.

First, let's consider our income needs. We've been living comfortably on our current income, but we'll need to adjust for inflation and the potential loss of income from our jobs. A common rule of thumb is to aim for 70% to 80% of your pre-retirement income in retirement. Using this guideline, we'll need an annual income of around $150,000 to $180,000 in today's dollars.

Now, let's look at our investment portfolio. We've diversified our assets across stocks, bonds, and cash, with a focus on income-generating investments. Our current portfolio yields around 3% annually, which is not enough to meet our income needs. We'll need to increase our yield to at least 5% to 6% to generate the income we need.

To achieve this, we can follow these steps:

1. Increase our allocation to dividend-paying stocks: We can add more dividend-paying stocks to our portfolio, focusing on companies with a history of consistent dividend growth. This will help us generate more income from our equity investments.
2. Add international stocks: International stocks tend to pay higher dividends than U.S. stocks. By increasing our allocation to international stocks, we can boost our overall yield.
3. Invest in value funds: Value stocks tend to pay higher dividends than the market as a whole. By adding value funds to our portfolio, we can increase our income generation.
4. Add small cap funds: Small cap stocks can offer higher yields than the total market. By incorporating small cap funds into our portfolio, we can further enhance our income generation.
5. Invest in REITs: Real Estate Investment Trusts (REITs) tend to pay yields significantly higher than the overall market. By allocating a portion of our portfolio to REITs, we can increase our overall yield and provide a stable income stream.
6. Consider preferred stock funds: Preferred stock funds have characteristics of both stocks and bonds and can provide a steady income stream. By adding preferred stock funds to our portfolio, we can diversify our income sources.



To illustrate our portfolio's potential income generation, let's assume we allocate our $1.85M portfolio as follows:

* 40% to dividend-paying stocks (yielding 3.5%)
* 20% to international stocks (yielding 4.5%)
* 20% to value funds (yielding 4%)
* 10% to small cap funds (yielding 4.5%)
* 10% to REITs (yielding 5%)

With this allocation, our portfolio would generate an annual income of $74,000, or 4% of our portfolio value. To reach our target income of $150,000 to $180,000, we would need to increase our portfolio to $3.75M to $4.5M.

To achieve this, we can follow a few strategies:

1. Save and invest more: We can continue to save and invest a portion of our income to grow our portfolio.
2. Reinvest income: We can reinvest a portion of our portfolio's income to take advantage of compounding.
3. Adjust our spending: We can adjust our spending habits to allocate more resources to our investment portfolio.

In conclusion, retiring when our children turn 18 is a complex decision that depends on various factors. By increasing our portfolio's yield, saving and investing more, reinvesting income, and adjusting our spending, we can work towards achieving our retirement goal. It's essential to regularly review and adjust our plan as needed to stay on track.