You’ll need 20 times your annual income to retire. That’s what a recent MoneyWatch article listed as the minimum amount required in an IRA or 401(k) in order to retire.
Are you kidding me?
If you make $100,000 a year, which is way above the national average, you’ll have to have $2 million set aside just to get out of the rat race?
[ad#Google Adsense 336×280-IA]If all you do is draw 4% interest from $2 million, and never touch the principal, that’s $80,000 a year in income.
But let’s be honest, how many of you actually have 20 times your annual salary sitting in your account?
If you’ve been diligent enough to put aside that money, you can do the 4% thing.
But most of us will never be able to live on 4%.
We can either tighten our belts, which none of us are very good at, or generate more income from the money we have put aside.
I chose more income.
And here’s how you can do it with the maximum amount of safety.
More Income… Without Big Risks
Treasury bonds pay next to nothing. You can’t even get 4% from the 30-year.
But if you play the corporate bond market right, you can get 6% to as much as 12% a year in income with a high level of safety and stability.
In fact, it’s fairly easy to get 6% to 8% in annual income even in this zero interest rate environment.
Using the $100,000 figure from earlier, if all you do is generate 6% in interest, you’ll cut the amount of time needed to reach $2 million by 25 years than you would at 4%.
But, even if you have the $2 million, why earn 4% when you can pull down a lot more?
Believe me, 6% to as much as 12% in income is very doable with a lot of safety thanks to corporate bonds.
Let’s look at an example.
Safety and Stability… Even in Coal
Arch Coal (ACI) (yes, from the hated coal industry) has a bond, CUSIP: 039380aj9, that you can buy for about $0.87 that will pay about 11% each year just in income until it matures in 2019.
That’s already substantial income. But add in the capital gain at maturity, the difference between the cost of $870 per bond and the $1,000 it returns in principal in 2019, and your annual total return is around 13.5% annually.
Even if interest rates rise, corporate bonds, especially short maturity corporates like the Arch Coal bond, will hold their value. You’ll see a little price fluctuation, but not enough to cause you to panic and sell at a loss.
And Arch Coal is one of the highest-paying, reasonably safe bonds out there. There are plenty of corporate bonds with even higher levels of safety that pay 6% to 9% just in income.
You owe it to yourself to get a better understanding of corporate bonds and how they can reduce the total amount necessary to retire.
Balance your bond holdings between the high flyers, 9% to 12%, and the more reasonable yields, the 5% to 7% area, and you’ll ratchet up your win-rate to the 98% to 99% range.
If you want to settle for 4% returns each year, that’s fine. But you can earn much more without adding hardly any risk to your portfolio thanks to corporate bonds. Take a look at them today.
— Steve McDonald
Source: Wealthy Retirement