Plan Your Financial Future planning for the financial aspects of retirement

[SlideRule]

An excerpt from Plan Your Financial Future a comprehensive guide book to growing your net worth {1e}, © 2013 APRESS, ISBN-13 (electronic): 978-1-4302-6065-3, pages 221-223

Part V Distributing Wealth During Your Lifetime

Chapter 16 Planning for the Financial Aspects of Retirement
…
How Much Will I Need?
Similar to the lifetime distribution of your wealth in planning for your child’s
higher education, the first question in planning for the financial aspects of
retirement is how much you will need. Generally, we can say you will need a
lot of money, but a specific computation using a financial function calculator
can give you a more approximate amount. Let’s use the following example to
describe the steps: assume that you are 35 and make $100,000 a year. You
should anticipate that you will need approximately 75 percent of your before-
tax income in today’s dollars to retire comfortably, or $75,000 annually.
As part of your retirement-planning assumptions, you anticipate that inflation
will average 3 percent annually prior to and during your retirement and
that you can earn a 7 percent after-tax return on your investments. You
plan to retire 30 years from now at age 65 and plan to be in retirement for
20 years. Note: All amounts are calculated using a Hewlett-Packard 10BII
financial function calculator.
Step 1: Compute your annual retirement income need in today’s dollars until
your planned date of retirement:
      • PV = $75,000 (Enter this as a negative number if using the
        HP 10BII calculator.)
      • I/YR = 3
      • N = 30
      • Solve for FV = $182,045
Step 2: Compute the lump-sum capital needed to generate this annual income
during the period of retirement:
      • PMT = $182,045 (You need to be in BEGIN mode if using
        the HP 10BII calculator, and the amount needs to be
        entered as a negative number.)
      • I/YR = 3.8835 (This is an inflation-adjusted rate of return,
        so enter 1.07 divided by 1.03, less 1, times 100 on your
        calculator.)
      • N = 20
      • Solve for PV = $2,596,849
Step 3: Compute the annual amount of savings needed to accumulate this
lump sum (assuming you have not already begun a retirement savings program
and have not accumulated any invested assets for retirement):
      • FV = $2,596,849 (Round to $2.6 million. If using the HP
        10BII calculator, you now need to convert back to END
        mode.)
      • I/YR = 7
      • N = 30
      • Solve for annual savings deposit required or payment =
        $27,524.65
Again, as in education funding, the important action to take here is to begin
to save some amount now. The amount that needs to be set aside from your
salary is intimidating—over 25 percent of your gross, and not your take-home,
pay (where the percentage to be saved would be even greater). Nevertheless,
do not fixate on the required annual savings or total lump-sum amount as
much as on the financial goal of beginning to save for your retirement.

BEST!
SlideRule

[Slasher006]

Oh, now you tell me this..

I bought Swissmicros calculators and also a HP 10Bii+

I am broke forever now...

:-P

[Albert Chan]

(10-19-2024 10:38 AM)SlideRule Wrote:  Let’s use the following example to describe the steps:
assume that you are 35 and make $100,000 a year. You
should anticipate that you will need approximately 75 percent of your before-
tax income in today’s dollars to retire comfortably, or $75,000 annually.
...
Solve for PV = $2,596,849
...
Solve for annual savings deposit required or payment = $27,524.65

The amount that needs to be set aside from your salary is intimidating
—over 25 percent of your gross, and not your take-home pay
(where the percentage to be saved would be even greater).

This saved too much!

Working years, savings > 27.5% of gross
--> spending + tax < 72.5% of gross.
--> spending alone is even less, say 50% of gross.

At retirement, mortgage is likely paid off, and we have no work related expense.
Amount needed should be less than 50% gross.

Even for 50% gross, it is still much smaller than 75% we assume needed.
More realistic saving rate for retirement ≈ 27.5% * (50/75) ≈ 18%, perhaps even less.

[striegel]

Was there supposed to be a hyperlink in this post? There is blue, underlined text, but it is not clickable.

Also, there is an error when viewing in threaded mode.

   

Alan

[SlideRule]

a) I don't have a hyperlink, just thought the material presented was sufficient;
b) I can't account for the error in threaded mode, not my rice bowl.

BEST!
SlideRule

ps: removed underline, added italic.

[Allen]

(10-19-2024 01:05 PM)Albert Chan Wrote:  More realistic saving rate for retirement ≈ 27.5% * (50/75) ≈ 18%, perhaps even less.

I've run similar calculations and 17-18% consistently comes up.

Fidelity agrees with 18% if you start around age 30.

As with all things financial, the real answer is: "it depends."

Save enough to not be a burden to your family and spend enough to enjoy your life, anywhere in the middle is ideal.

[Albert Chan]

(10-19-2024 10:38 AM)SlideRule Wrote:  Step 2: Compute the lump-sum capital needed to generate this annual income
during the period of retirement:
      • PMT = $182,045 (You need to be in BEGIN mode if using
        the HP 10BII calculator, and the amount needs to be
        entered as a negative number.)
      • I/YR = 3.8835 (This is an inflation-adjusted rate of return,
        so enter 1.07 divided by 1.03, less 1, times 100 on your
        calculator.)
      • N = 20
      • Solve for PV = $2,596,849

Why suddenly use BEGIN mode? To "push-up" retirement number?
Had we use END mode, PV = $2,596,849 / 1.038835 < 2.5 million

Why would salary be fixed for 30 years, instead of closely matching inflation?
If income do match inflation, we can remove inflation as a factor.

lua> i = 0.038835 -- inflation-adjusted rate of return
lua> tvm(20, i, nil, -.75, 0)
10.2987055226939
lua> tvm(30, i, 0, nil, _)
-0.187229233167348

We need about 10 times salary savings for 20 years retirement.
This is about 18.7% saving (of gross) during 30 working years.