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February 28, 2008

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I love this calculator. I've been dreading the "retirement fund calculation" for a while, because I didn't think I would like the results. I'm 31 and currently only putting $3500 annually into my 401(k) (with no match) because we're aggressively paying down debt instead. Once the majority of the debt is paid off, in 3 years (4 at the most), we will aggressively fund our retirement plans. So I assumed I the following:

Years to Retirement: 30 (asuming I will start funding retirement in a big way when I'm 35)
Years in Retirement: 30 (die at 95? just in case)
Current Portfolio Amount: $7200 (my 401k balance now)
Inflation Rate: 3.0%
Investment Return: 8.0% (conservative)
Income Requirement: $75,000 (no additional income)

That gave me $1949 if I run down to 0, and $3001 if I withdraw no more than 4%. So I figure $2500/month is a good figure to aim towards. I think we'll be able to do that in 3-4 years when our debt is paid off, so this makes me feel pretty good. :) And if we can save more, or we get a better return on our money, maybe we can retire closer to 60.

Here's my question: How do you figure what income you'll need at retirement? Our house will be paid off then, and we won't be funding our retirement plan anymore, so I think $75K (in todays dollars)might be a high number? Then again, I know we'll want to travel, and spend money on our kids/grandkids, so maybe its too low? I'd be interested to see how people determine that figure.

I estimated retiring at 50 (about to turn 32) and living to be 100. I set the required income as my current salary minus retirement contributions. The savings required is $60/mo more than I currently save. To me this says I should be able to retire BEFORE 50 because I plan to increase my retirement savings (currently max out 401k and IRA) in the next year or two after I finish making some home improvements.

Also, I used my current (net) salary as the expectation because although the mortgage will be paid off, I'm sure healthcare costs will significantly increase. I will also travel more in retirement.

RL, don't forget healthcare costs. They may rise dramatically as you get older.

The thing I don't like about this calculator is that it assumes you'll continue to earn the same rate of return for the rest of your life. In reality, you'll almost certainly be more conservative after you retire.

These types of calculations are one of the advantages of working with a financial advisor - which I know you index fund buyers don't like ;)

I work for a financial advisor and we have an awesome calculator that lets you enter in future contributions, social securty amounts (if you think you'll get social security), changes to future contributions, a different estimated rate of return after retirement, different tax bracket in retirement and all sorts of cool stuff!

You might want to check with the company that does your 401(k). If they have a local advisor, he/she might be willing to do these calculations with all the more-accurate bells and whistles. I know my boss will do this for our 401(k) clients and their employees.

This calculator lit a fire under me. It showed that I could retire in 10 years (at 56) by saving about $5k/month, which I can do, because my house is paid for and is cheap to live in. I assumed $60k/year post-retirement (way more than I spend now) and living until 86, which is longer than anyone in my family has survived.

It would be good to have more per year in retirement, and I'll shoot for that. I'm starting from a small investment, but I like a challenge.

Ouch my result was a bit painful...to never touch the principle, we need to save nearly $10,000 a month. For 2008, our average will be more like $6000 a month. Unless we can come up with $40k a year to save, we might have to rethink really retiring when I am 46!!

Years to Retirement 17
Years In Retirement 30
Current Portfolio Amount 240,000
Inflation 3%
Investment Return 10%

Expected Income Requirement 90,000
Outside Sources of Income 20,160
Income Needed From Investments 69,840

1.Run the Portfolio Down to Zero $1,561,647 Savings Req: $483
2.Maintain Same Dollar Amount $1,651,143 Savings Req: $651
3.Number 2. Inflation-Adjusted $1,778,877 Savings Req: $891
4.Withdraw no more than 4% $2,885,872 Savings Req: $2,971

I set it to retire at 60 but actually the age difference between me and my spouse might change things some.

What this shows me is that we have a ways to go but at our current 10% savings rate we are above the option 3 amount which is encouraging. At least I have a rough idea that we are on track to retire a few years early and still meet inflation adjusted income needs and leave something behind for our children.

I think these estimated returns of 8-10 percent are quite rosy. That means the Dow Jones Average will be at around 2,000,000 in the year 2100. Our first 8 years of this century have not been this good. I paraphrased this from Warren Buffet's letter to shareholders. I assume a much lower rate of return from future market gains and have been saving more of my income.

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