BEFORE RETIREMENT Income/Expenses Savings Calculations INVESTMENTS Criteria Stocks

Savings How Much One of the most important questions every one asks when thinking about retirement is "How much savings does it take to maintain my current life style in retirement This page will shed some light on this very important question. The answer may be different than you expect, and may cause some real changes in your spending and savings habits, right now. The following analysis was done using Intuit's "Quicken Financial Planner" (QFP).  It is a continuation of the example calculation started on the Income/Expense page. Using the QFP program, the following table can be generated: Cash Stocks 50k 100k 200k 250k 400k 500k IRA Stocks 100k 200k 300k 500k 600k 1000k Living Expenses, year 1 25k 35k 50k 65k 80k 115k All numbers are in thousands (and are rounded off in some cases). Calculations are for a couple,  man age 65 and wife age 63 (both on social security) Standard tax deductions are taken. Life expectancy is 84 for the man and 90 for the wife. At the wife's death in 27 years, the estate has only a nominal net worth(less than 50k excluding home and possessions). cost of living is assumed to be two percent. The average yield on the investment portfolio is eight per cent. Interpretation of the table: The above data should be interpreted in the following manner.  Following the example started on the "Income/Expenses" page, our example family earning $40,000 today , husband age 45, wife,  age 43, will have an estimated income of $72,000 earning at retirement.  Their expenses in the first year of retirement will be an estimated $47,000 and it will grow to something near $77,000 in the final year of the program. Looking at our table above we see that for expenses of $50,000 (close to our example of $47,000) in the first year of retirement, that about $500,000 will be required in an investment portfolio earning on average 8% per year . Less that this amount of savings at the start of retirement will result in either a drop in the living standard , or just plain going broke before death. The above calculation assumes that Social Security is included, and grows at 3 % /year from today's base of about $18,000 per couple. An Alternate View: Another way to view savings and it's effect on your standard of living in retirement can be looked at in the following example: Assume your savings at age 65 is $100,000 cash and $200,000 in an IRA. Looking at the above table shows this corresponds to an annual expense of $35,000 in the first year of retirement. Again assuming you are 45 years old today, using the a three percent Inflation Factor for 20 years, F20= 1.81, then this income would correspond to an earnings today of 35000/1.81 = 19,300. The message is clear! To maintain your life style in retirement you must: Save a maximum during your working years. Invest to maximize your return. The alternates are: Lower your life style, or Die early How to maximize savings The only way to maximize savings is to save a regular amount every year, invest it in superior common stocks with a high a rate of total return, and stay within reasonable risk limits. We will examine the first of these elements in the following discussion. How much each year ? The amount to save per year can be calculated with the "Sum of an Annuity" equation Equation 5 S = A * (((1 + j)n - 1) / j) Which can be arranged to be: Equation 5a A = (S * j)/((1 + j)n - 1) where: A = amount saved each year S = total value of the savings after n years j = compounded return rate on investments n = number of years until retirement For instance, to save $100,000 after 20 years in a portfolio earning 8% per year requires $2185 saving per year. A = (100000 * 0.08)/((1 + .08)20 - 1) = 2185 To save five times this amount, $500,000, obviously takes five times as much saved each year, i.e. 5 * 2185 = $10,925 (and so forth). These annual savings figures are large and would be very difficult for most people. Fortunately, there is another factor in the equation, and that is the annual return on investment. By being more bold in our investment portfolio and going for higher returns, but staying within the bounds of acceptable risk, the amount of money saved each year can be dramatically reduced. For instances, if the rates of return are 10%, 12%, 14, or 16% per year, the saving required per year become $8730, $6940, $5490, and $4,334 respectively; a much more managable sum. Estimate your saving requirement per year Use the java applet below to estimate the amount of savings you will require each year until retirement to have the desired total savings. Now what ? We now have a way to estimate how much savings will be required before retirement Now lets go to the Investments pages to learn how to make those dollars grow at the rate to make this a real success story.

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