Q. Several years ago one of your columns included an estimate of net worth necessary for retirement regardless of age. Basically, it was a value 20 times the expenses needed for one year. It was predicated on the conditions at the time and we have seen some radical changes in interest rates, etc., that would affect the assumptions of 20 times expenses.

My wife and I are approaching our mid-50's, and our goal for 20 times expenses was $800,000 with the premise that $40,000 would be sufficient and realistic even with increasing medical insurance rates, lower returns on investments, etc. Would you update the assumptions for present times? I've spoken with many folks in my age range and I think they all have the same concern about "how much is enough?"

---J.B., Keller, TX

  

A. I think you're referring to my "Life of Riley Index." It's an indicator I created in 1989 to measure how much money you would need to be independently middle class, a kind of coupon clipping Joe Six Pack.

The indicator is calculated in two steps. First, average the yield on common stocks and the yield on a 5 year Treasury note. This provides the yield on a 50/50 Couch Potato portfolio.   Then you find out how much investment money you need by dividing the median family income by the portfolio yield.

In 1980, for instance, the median family income was $24,800, the S&P 500 stocks were yielding 5.26 percent and the 5-year Treasury was yielding 11.45 percent. As a consequence, you only needed $296,828 to be independently middle class.

By 2001, S&P 500 stocks were yielding only 1.32 percent, the 5-year Treasury was yielding 4.55 percent, and the estimated median (two-earner) family income was $62,053. So you needed $2,114,242 to be independently middle class. To produce your target income of $40,000 a year, you would have needed $1,360,544.

Today the S&P 500 stocks are yielding a little more, 1.6 percent, but the 5-year Treasury note is yielding only 2.26 percent. That means an average portfolio yield of only 1.93 percent. As a result, you'd need about $2.1 million to generate a $40,000 income.

  Pretty depressing.

If we assume that both equity and fixed income investments will provide historical returns, however, the results are less depressing. Using an online calculator of portfolio survival I found that a 50/50 portfolio had a 58 percent chance of surviving 50 years if your initial withdrawal rate was 5 percent and subsequent withdrawals were indexed to inflation. Survival odds rose to 95 percent if the withdrawal rate was reduced to 4 percent.

Readers who would like to learn more about withdrawal rates and portfolio survival should visit John Greaney's website. They can also use an online portfolio survival calculator.

Read about the Life of Riley Index.

Read about the lower cost of the Life of Riley Index for Retirees.    

  

Q. My wife and I have a debate. I would like to sign up for the credit card 0 percent interest offer for 12 or more months and pay the minimum amount allowable while drawing as much interest free money as the credit card company will allow me. I will use that money to pay down the mortgage and draw interest on that same amount in a savings account until I have to pay it off.

My wife argues that I am sacrificing my credit rating. I argue that I am earning at least 7 percent on this move when I pay the balance off before the due date. Who's right?

---A.R., Dallas, TX

  

A. Neither of you is correct. The problem is that you are planning to use the same money twice. When you borrow the 0 percent credit card money and apply it against your mortgage balance you will save whatever the interest rate is on your mortgage. But the money will be gone and you'll have to replace it from some other source if you are to avoid paying interest at the end of the free money period.

If you pay down the mortgage with the money, you won't be able to use the same money to earn interest in a savings account. If you put all of the 0 percent credit card money in a savings account you will earn interest but the rate will be both pathetic and taxable. As a result, your net benefit will be small.

Doing this trick won't have any impact on your credit rating but its value to you is pretty small.    

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Personal finance writer Scott Burns is syndicated by Universal Press. His twice weekly column appears in newspapers from Boston to Seattle. He is the Chief Investment Strategist for AssetBuilder, Inc. Readers can register at www.scottburns.com. Questions/comments can be posted directly. They can also be sent, without registration, to scott@scottburns.com. Questions of general interest will be answered in future columns and on this blog.

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