Suppose that you are around 65 and ready to retire, or thinking about retiring. You have accumulated a large nest egg through your 401(k), IRAs, and after-tax investments. You’ve been saving for many, many years and now you are in need of $50,000 per year of income in addition to the amount you will receive from Social Security, and you’re wondering where you can put your nest egg in order to generate that kind of income. Fortunately, there are multiple asset classes to choose from. However, the amount you would need to invest in each asset class to generate the $50,000 of annual income differs GREATLY between asset classes.
For example, you would have to:
Invest about $20 million in 2-year Treasury bills to generate $50,000 annual income.
Invest about $1.7 million in dividend yielding stocks to generate $50,000 annual income.
Invest about $800,000 in high yield (junk) bonds to generate $50,000 annual income.
What you may notice is the huge difference there is in the amount required to generate income. You may also notice that there is a big difference in terms of risk, between the asset classes above. Treasury bills are considered to be safe investments, but the risk of losing principal spikes up with both stocks junk bonds. The examples above do not consider capital gains – they simply show how much it would generally take to derive desired income.
Another way to generate income is by using an annuity. Many annuities today are available with an income rider – which guarantee lifetime income and guarantee that remaining principal will pass along to your heirs after you depart this world. With this option, you would need approximately $1 million (and much less depending on holding time prior to receiving income) to generate the desired income.
Returns extrapolated from http://advisorperspectives.com/commentaries/pioneer_041013.php