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Retirement Needs Calculation:
How much money do you need in total when at
retirement age? Let’s try an example. Let’s say
you believe you’ll need $50,000 a year to survive
upon retirement. Assume you’ll live for 20 years
after that. You’ll need enough money at that
point to generate $50K a year, while drawing
down the total to zero at the end of that period.
We’ll assume a conservative earnings rate for
your savings, say 4%, based on past earnings of
a mix of different types of investments.
We need to start with an arbitrary amount, say
$500K, deduct $50K, for the first year, and then
increase out remaining amount by 4% to
increase our fund. Then repeat 19 more times
(yrs). This is easiest done on a spreadsheet.
Upon first try with this we see that this leaves us
with a negative amount at year 20. So we work
backwards, upping the starting amount until we
wind up with zero at year 20. Turns out we need
$683K to retire under this scenario.
If this is too complicated, here’s an easy way to
come up with a very conservative estimate of
what you will need. To apply to our example,
take the $50,000 and divide by our assumed
earnings rate, 4%. This comes to $1.25 million.
Essentially, this is telling us we require $1.25M to
generate $50K a year in perpetuity. It’s very
conservative, as only if we live for many years,
our investment returns are much worse or we
spend much more than $50K a year will we
approach using up this total amount.
Of course, things may well be a little more
complicated. For one, we haven’t included any
other income, such as estimates Social Security
Payments or any other guaranteed payments
from a private Pension Plan, for example. We
should deduct those amounts from our $50K
and recalculate.
There are also some tax effects that also need to
be considered. We would need to increase our
$50K for any taxes we believe we will have to
pay.
Now, a new question - How much do we need to
save every year from now until retirement to
have $683K? Another example: Let’s say we are
age 35, have zero savings, intend to retire at age
65, and assume again our investment earnings
rate is 4%.
We’ll assume we are adding an arbitrary amount,
say $10K into our fund for the first year, and then
increase it by 4% for the first year. Then we add
another $10K for the second year, and increase
the entire fund by another 4% for the 2nd year .
We then repeat 28 more times (yrs). This is
easiest done on a spreadsheet. Upon first try
with this we see that this leaves us with less than
our goal of $683K in year 30. So we work
backwards, upping (in this case, could be
lowering in others) the annual amount until we
wind up with $683K in year 30. Turns out we
need $12,400 a year to retire under this scenario.
To make this more realistic, we may to increase
our retirement fund for inflation. If so, we would
increase our fund by the assumed inflation rate,
say 2% per year. So we increase it 2%,
compounded for 30 yrs, which is $1.27 million. Of
course, this will generate more than $50K in
nominal earnings starting in 30 yrs, but the value
(purchasing power) will be the same, given
inflation.
Retirement Vehicles:
Defined Benefit Plans - These are employer
funded plans where there is a formula, generally
based on years of employment, that determines
how much of a (monthly) benefit an employee
will receive at retirement. Sadly, as costs to
employers have increased, these retirement
plans have been infrequently offered to current
employees.
Defined Contribution Plans - these are plans
where the employee contributes a certain
amount into the plan per pay period. This money
is generally tax deferred, and the employer may
contribute, or match, the first several percent of
contributions. The money in the plan is invested,
and any investment gains/returns are re-invested
tax-free until they are distributed. Distribution
generally takes place at retirement, after age 59
½. Payouts can occur earlier but this can cause
penalties and early tax liabilities. There are
several types of these plans:
401k Plans: this is the most common defined
contribution plan. In most of these, the company
matches from the first 1 to 4% or more of the
employee’s contributions. For example, say an
employee contributes 2% of his salary to the
retirement plan. The employer will match that 2%
into the plan. So the employee actually has 4%
of his salary put into the retirement account. The
employee has, in essence doubled his money
immediately. It is this feature that makes the
401K savings plan so valuable. An employee
should always contribute at least the minimum
amount that is matched.
Generally speaking this salary deduction comes
before taxes. The employee is paying less taxes
on his overall salary upfront, so there is an
immediate tax benefit. The entire investment and
retirement gains will be taxed upon distribution,
however.
One can put additional money, over and above
the matching amount, into the savings plan, and
it will also be tax-deferred. Currently the limit that
can be put into a plan is $15,500 per year, or
whatever the maximum percent your plan allows,
whichever dollar amount is less.
It is a personal decision of how much to actually
save in a plan. It is wisest to save as much as
possible while still having enough for normal
living expenses. In addition one should enough
money for an emergency fund that will allow you
to weather an financial emergency - 6 months
income is a fair amount for this. Remember, you
can’t withdraw money from these tax deferred
accounts without penalty. The penalty for early
withdrawal of funds is 10% - and that’s in
addition to the ordinary taxes you’ll need to pay
on a distribution.
Roth IRA: this savings plan is similar to a 401K,
except the contributions are taxed as ordinary
income before they go into the plan. The
investment returns grow tax-free while they are
in the plan. In addition, the are not taxed even
upon distribution. So with the Roth plan one is
taxed on the way in but not on the way out, a
potentially even more lucrative strategy,
depending on one’s age and tax status.
However, you must wait until you are 59 ½
before you can withdraw the money.
Other Tax-Deferred Plans:
There are other types of tax-deferred plans –
examples are Profit sharing Plans and Deferred
Compensation Plans. They operate under similar
principles.
Back to Top
How much money do you need in total when at
retirement age? Let’s try an example. Let’s say
you believe you’ll need $50,000 a year to survive
upon retirement. Assume you’ll live for 20 years
after that. You’ll need enough money at that
point to generate $50K a year, while drawing
down the total to zero at the end of that period.
We’ll assume a conservative earnings rate for
your savings, say 4%, based on past earnings of
a mix of different types of investments.
We need to start with an arbitrary amount, say
$500K, deduct $50K, for the first year, and then
increase out remaining amount by 4% to
increase our fund. Then repeat 19 more times
(yrs). This is easiest done on a spreadsheet.
Upon first try with this we see that this leaves us
with a negative amount at year 20. So we work
backwards, upping the starting amount until we
wind up with zero at year 20. Turns out we need
$683K to retire under this scenario.
If this is too complicated, here’s an easy way to
come up with a very conservative estimate of
what you will need. To apply to our example,
take the $50,000 and divide by our assumed
earnings rate, 4%. This comes to $1.25 million.
Essentially, this is telling us we require $1.25M to
generate $50K a year in perpetuity. It’s very
conservative, as only if we live for many years,
our investment returns are much worse or we
spend much more than $50K a year will we
approach using up this total amount.
Of course, things may well be a little more
complicated. For one, we haven’t included any
other income, such as estimates Social Security
Payments or any other guaranteed payments
from a private Pension Plan, for example. We
should deduct those amounts from our $50K
and recalculate.
There are also some tax effects that also need to
be considered. We would need to increase our
$50K for any taxes we believe we will have to
pay.
Now, a new question - How much do we need to
save every year from now until retirement to
have $683K? Another example: Let’s say we are
age 35, have zero savings, intend to retire at age
65, and assume again our investment earnings
rate is 4%.
We’ll assume we are adding an arbitrary amount,
say $10K into our fund for the first year, and then
increase it by 4% for the first year. Then we add
another $10K for the second year, and increase
the entire fund by another 4% for the 2nd year .
We then repeat 28 more times (yrs). This is
easiest done on a spreadsheet. Upon first try
with this we see that this leaves us with less than
our goal of $683K in year 30. So we work
backwards, upping (in this case, could be
lowering in others) the annual amount until we
wind up with $683K in year 30. Turns out we
need $12,400 a year to retire under this scenario.
To make this more realistic, we may to increase
our retirement fund for inflation. If so, we would
increase our fund by the assumed inflation rate,
say 2% per year. So we increase it 2%,
compounded for 30 yrs, which is $1.27 million. Of
course, this will generate more than $50K in
nominal earnings starting in 30 yrs, but the value
(purchasing power) will be the same, given
inflation.
Retirement Vehicles:
Defined Benefit Plans - These are employer
funded plans where there is a formula, generally
based on years of employment, that determines
how much of a (monthly) benefit an employee
will receive at retirement. Sadly, as costs to
employers have increased, these retirement
plans have been infrequently offered to current
employees.
Defined Contribution Plans - these are plans
where the employee contributes a certain
amount into the plan per pay period. This money
is generally tax deferred, and the employer may
contribute, or match, the first several percent of
contributions. The money in the plan is invested,
and any investment gains/returns are re-invested
tax-free until they are distributed. Distribution
generally takes place at retirement, after age 59
½. Payouts can occur earlier but this can cause
penalties and early tax liabilities. There are
several types of these plans:
401k Plans: this is the most common defined
contribution plan. In most of these, the company
matches from the first 1 to 4% or more of the
employee’s contributions. For example, say an
employee contributes 2% of his salary to the
retirement plan. The employer will match that 2%
into the plan. So the employee actually has 4%
of his salary put into the retirement account. The
employee has, in essence doubled his money
immediately. It is this feature that makes the
401K savings plan so valuable. An employee
should always contribute at least the minimum
amount that is matched.
Generally speaking this salary deduction comes
before taxes. The employee is paying less taxes
on his overall salary upfront, so there is an
immediate tax benefit. The entire investment and
retirement gains will be taxed upon distribution,
however.
One can put additional money, over and above
the matching amount, into the savings plan, and
it will also be tax-deferred. Currently the limit that
can be put into a plan is $15,500 per year, or
whatever the maximum percent your plan allows,
whichever dollar amount is less.
It is a personal decision of how much to actually
save in a plan. It is wisest to save as much as
possible while still having enough for normal
living expenses. In addition one should enough
money for an emergency fund that will allow you
to weather an financial emergency - 6 months
income is a fair amount for this. Remember, you
can’t withdraw money from these tax deferred
accounts without penalty. The penalty for early
withdrawal of funds is 10% - and that’s in
addition to the ordinary taxes you’ll need to pay
on a distribution.
Roth IRA: this savings plan is similar to a 401K,
except the contributions are taxed as ordinary
income before they go into the plan. The
investment returns grow tax-free while they are
in the plan. In addition, the are not taxed even
upon distribution. So with the Roth plan one is
taxed on the way in but not on the way out, a
potentially even more lucrative strategy,
depending on one’s age and tax status.
However, you must wait until you are 59 ½
before you can withdraw the money.
Other Tax-Deferred Plans:
There are other types of tax-deferred plans –
examples are Profit sharing Plans and Deferred
Compensation Plans. They operate under similar
principles.
Back to Top
| Retirement Planning |
Following are some general principles to
consider when planning for retirement as well as
some concrete tools of which you can take
advantage. The key is to make a commitment at
the earliest age possible to a regular savings
program. Regardless of your age you can
increase your security later in life by preparing
for it now.
How much money do need to save to ensure that
you have adequate savings for retirement? This
depends on several factors. The first is the age
that you want to retire? The second factor is
your current age? The third is an estimate of how
long you believe you will live in retirement? Of
course, one should estimate conservatively here,
that is, assume you live on the higher end of any
estimate. You also need to now how much
money you may receive from other sources at
retirement.
Of course, you may want to consult with a
financial professional to get exact figures. I am
available for private consultation.
consider when planning for retirement as well as
some concrete tools of which you can take
advantage. The key is to make a commitment at
the earliest age possible to a regular savings
program. Regardless of your age you can
increase your security later in life by preparing
for it now.
How much money do need to save to ensure that
you have adequate savings for retirement? This
depends on several factors. The first is the age
that you want to retire? The second factor is
your current age? The third is an estimate of how
long you believe you will live in retirement? Of
course, one should estimate conservatively here,
that is, assume you live on the higher end of any
estimate. You also need to now how much
money you may receive from other sources at
retirement.
Of course, you may want to consult with a
financial professional to get exact figures. I am
available for private consultation.
Have Questions? Our consultants are available to help you with any
financial question. We can also provide in-depth consultation concerning
any financial issue facing you. We can help. Please contact:
Best-Financial-Advice.com
financial question. We can also provide in-depth consultation concerning
any financial issue facing you. We can help. Please contact:
Best-Financial-Advice.com
 | |  | |  | |  | |  | |  | |  | |  |
Have Questions? Our consultants are available to help you
with any financial question. We can also provide in-depth
consultation concerning any financial issue facing you. We
can help. Please contact: Best-Financial-Advice.com
with any financial question. We can also provide in-depth
consultation concerning any financial issue facing you. We
can help. Please contact: Best-Financial-Advice.com
 | |  | |  |
Have Questions? Our consultants are available to help you with any
financial question. We can also provide in-depth consultation concerning
any financial issue facing you. We can help. Please contact:
Best-Financial-Advice.com
financial question. We can also provide in-depth consultation concerning
any financial issue facing you. We can help. Please contact:
Best-Financial-Advice.com
Have Questions? Our consultants are available to help
you with any financial question. We can also provide
in-depth consultation concerning any financial issue
facing you. We can help. Please contact:
Best-Financial-Advice.com
you with any financial question. We can also provide
in-depth consultation concerning any financial issue
facing you. We can help. Please contact:
Best-Financial-Advice.com
Have Questions? Our consultants are available to help
you with any financial question. We can also provide
in-depth consultation concerning any financial issue
facing you. We can help. Please contact:
Best-Financial-Advice.com
you with any financial question. We can also provide
in-depth consultation concerning any financial issue
facing you. We can help. Please contact:
Best-Financial-Advice.com
Have Questions? Our consultants are available to
help you with any financial question. We can also
provide in-depth consultation concerning any
financial issue facing you. We can help. Please
contact: Best-Financial-Advice.com
help you with any financial question. We can also
provide in-depth consultation concerning any
financial issue facing you. We can help. Please
contact: Best-Financial-Advice.com