Taking Care of Mom and Dad: The Critical Mass Approach

If you listen to Bob Brinker's Money Talk radio program, you are familiar with the critical mass approach to investing. Brinker described this approach as having accumulated enough wealth that you only have to work if you want to. I'll try to quantify this approach mathematically.

Assume that your parents need $65,000 a year in income to retire comfortably. If, combined, they get $20,000 a year from Social Security, they'll need another $45,000 in retirement income. How big would their portfolio need to be to earn them this much money?

Count any recurring income from defined benefit pensions. If your mother worked as a teacher and can count on $20,000 in annual pension income, you're already down to $25,000.

So, your parents investments will need to generate $25,000 a year. The 5 percent rule means that they would need to have $500,000 in investment assets to reach critical mass.

Obviously, having half a million dollars above their pension benefits is going to tough for most middle-class people to accomplish. In most cases, your parents' home is going to be the largest single asset that they have to contribute toward this number -- that is, if they sell it or use some form of financing to get money out of it.

In many cases, though, the critical mass approach is going to impress on your parents that they need to work longer and save more.