You do not need to be a Harold Camping of retirement and make nonsense prediction when it comes to your retirement future. I will show you my thought process and the formula that I use to get the numbers close enough and may be you can take some of the points I will make and create and customize your own.
For the past two years, the retirement ball has been bouncing in my head like an over inflated basketball. I always ask around people on how they plan for retirement but I never get satisfactory answer. All I get are pockets of information with lots of holes in it. But don’t get me wrong, their way probably works for them and I am not saying that they are wrong, all I am saying is that it only partially answered my question. I search over the web but I really can’t find what I am looking. Most of the time it leaves me with more questions than answer and hurts my head keeping track of the questions without finding a good-enough answer. There are a bunch of online calculator and they are really useful but they do not paint the whole picture. What I am trying to do here is paint a big picture that, hopefully, answers “most” of your questions as it answered mine.
I also noticed that this topic is sensitive to most people so they seemed to be “guarded” when they are talking about retirement topic. Some people think that I want them to tell me their own numbers so they get all sensitive about it. In reality, I really just want to plug-in my number in their formula to see if I am on the right track or I need to make adjustments.
Believe me, by no means that I claim to be an expert. I am just a frustrated person trying to find answer.
Enough blablabla and let us get down to business. I will post this in series of 4 problems because that is the only way I can explain it in a concise way and in a format that even the monkeys in Bruno Mars “The Lazy Song” can understand.
Problem 1: If my wife and I are to retire right now how much would we need yearly to live comfortably in Sunny Diego, Ca.
Given: House is paid off; Kids has their own families and are stable and doing great. So in short “just the two of us” (don’t let that song creep in and take over, stay focus)
Answer: If my wife and I retire this year (27 May 2011), $40k is enough to support our needs.
I would be comfortable with $3000 a month for monthly expenses. 3k/month x 12months = $36,000 + $4,000 misc = $40,000 Total a year
-$3,000 a month are for the following:
1 car payment $500 a month
food for 2 $1,000
Thoughts: That was easy math problem, $40k a year if I retire right now…Moving on..
Problem 2: Breaking news!!! We are not retiring this year. Therefore, how much is the equivalent of $40k (zoooomm, fastforward…) 35 years from now given that the average inflation rate is 3.5
Answer: Google “Future Value Calculator”, some of the boxes are confusing to understand but you can do this calculations yourself as well. http://www.calculatorsoup.com/calculators/financial/future-value.php
For the first year (2012), that same 40k with 3.5% inflation is equivalent to $41,400
For the Second year (2013), that same 40k with 3.5% inflation is equivalent to $42,849
Fast forward to 35 years (2046) it is $133,343
Thoughts: $40k in 2011 = $133,343 in 2046. It is what my wife and I need to be withdrawing every year when we retire in 2046. Pretty easy math too..
Problem 3: How much funds am I putting in my investments right now (ie. 401K, Roth IRA, Stocks, etc.)?
How much will it be 35 years from now?
Given: Using figurative numbers, if I have 50k in my 401k right now, I am making 100k per year; contributing 6% with company matching 50% of up to 6%; and how much will it be if I have 35 more years to retire.
Answer: I fire up trusty Google to locate a 401k calculator, bammm.. http://www.mycalculators.com/ca/401kcalcm.html. This particular one factor-in good stuffs like “Expected Annual Salary Increase” which I left at the default 3% settings. I set the APR @ 8%. My final total is $2,946,073 or about $3million.
Thoughts: I used figurative numbers for the sake of easy math but you can easily plug-in your own. This is just to get us an idea.. Need to factor-in taxes when using 401k or other tax deferred accounts, there are retirement investments that are tax-free when you take it out. Yes tax-free, not a lot of people know about this investment vehicle and some does not even consider it as an investment vehicle but read book “Tax-free Retirement” by Patrick Kelly or his new book that will get release this month (http://www.tax-freeretirement.com/)…
Problem 4: Base on the answer to problem 2 and 3, how many $133,342 yearly withdrawal can I take out from $2,946,073 before I ran out.? How many years can it sustain me? Do I Have Enough? (makes sense to use the title here)
Answer: Again I Google “retirement withdrawal calculator” and it took me to the same website http://www.mycalculators.com/ca/retcalc1m.html. I have my settings still earning at 6% APR and still at 3.5 average inflation rate. It says that I can have 32 years of withdrawal factoring in the 3.5 inflation rate. Now I don’t expect to live more than 20 years after retirement but if God permits, I have the funds to do so.
Thoughts: Base on this answer I will know if I need to go back to problem 3 and add more funds on my investments or leave it alone. Other note worth mentioning is that annuities are also popular retirement vehicle that addresses this question but different method but that’s different discussion.
Final Thoughts: There it is.. I do not expect this document to be bulletproof perfect but as a rough guide (very rough guide). As I stated in the beginning, I have a hard time looking for a guide that states these retirement questions that I have in mind in one concise document.
I will guarantee you that you WILL find holes on a number of points (even my math and the % I used) that I made above. I know there is holes because this kind of topic takes years of experience to finally tune-in to get the formula just right. It is a great sign if you see the flaw because that shows that you are getting the point of these blog. If you do find new points to factor-in please let me know. I am really interested in learning from your view.
Most people would say that you need to plan to have 1.5 million to retire and just live off of the interest but that is not a good enough answer to me. There is a flaw in that way of thinking, 1.5 million is good retirement right now but 1.5 million is not the same value 35 years from now.
This blog probably will leave me expose and show how little I know about this topic but that is an acceptable risk knowing that I will get a better understanding once I start seeing replies from other people’s point of view.
And also, most of you figured it out that our current monthly expenses right now is not $40k. My kids are 7 and 4 in private school, mortgage, food, bills, etc..