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What
Do You Need to Save to Retire Comfortably?
By
Barry Habib
Let's
get into how much money you have to invest monthly to retire in
either 5, 10, 15 or 25 or 30 years from now and to receive an income
that, by today's standards, you'd be very comfortable with. Before
we do that, let's look at the assumptions we need to make.
First we will assume that you have at least $10,000 to start
with. Obviously, if you have more, you will reach your goal sooner.
If you have less, you'll have to accumulate the $10,000 first and
then follow the chart for how many years it will take.
Second, we have to assume a rate of return. For our example,
we're going to use an annual rate of return of 14% because that's
the annual rate of return for the S&P 500 over the last 20 years.
Third, we have to assume an annual rate of inflation. The
annual rate of inflation based on the past 20 years average is 3.5%.
If you look at our chart, you can see how much money by today's standards
we would earn annually if we were to invest a monthly amount for a
certain period of years. Now if you look at the top of the chart,
it reads, "Years to Retirement," and we've broken it down
into columns of retirement in 5, 10, 15, 20, 25 and 30 years from
now. Then the left hand column, from top to bottom shows the annual
income by today's standards. We start at $30,000 per year and go up
in $10,000 increments until we reach $100,000 per year by today's
standards. If you wanted to retire say 15 years from today, with a
$50,000 annual income, by today's standards, you would have to invest
$879 per month, every month for the next 15 years. If you were able
to contribute to a qualified plan, you probably would invest the entire
amount before taxation. If you don't have access to a qualified plan,
certainly it would be a little bit more costly because that number
would be net after taxes.
But if you're a relatively good income earner, and let's say your
income is $70,000 a year, now at retirement age, you probably would
only need about 70% of your normal income, considering that your tax
bracket is probably going to be reduced and you will have paid off
most of, if not all of, your debts.
In addition, you won't have to make additional savings and chances
are whatever college tuition you've been responsible for would have
been completed by then. So if your annual income is now $70,000, you
should be able to live the same type of lifestyle with $50,000 per
year by today's standards. According to our chart, that means you
would have to put away $879 a month. $879 a month is approximately
$10,500 a year. So if you're making $70,000 a year, you'd have to
save about 15% of your income and live on the remaining 85% - which
is not a terrible scenario considering that what you're building is
a very comfortable retirement in just 15 years from now.
If your time horizon is 20 years rather than 15 and you'd like to
have $80,000 by today's standards, rather than $50,000, you'd look
on your chart and find $803 a month. So you need to find out where
you fit in and what you can afford. Certainly if you're considering
a 20-year time frame, and looked at $60,000 per year by today's standards,
that's $574 per month
.
You have to consider this as if it were a bill - as if it were a mortgage
payment, as if it were an automobile lease - whatever the debt or
obligation, consider this a debt or obligation to yourself. After
all, shouldn't you be the most important person that you pay?
The
Future Value of Your Annual Income
YEARS
TO RETIREMENT
This
chart takes into account the effects of inflation and corresponds
to the chart shown on our "What Do You Need to Save to Retire
Comfortably?" chart.
If
we take a look at a $50,000 income, 5 years from now, it would be
the same as a $59,000 income. In other words, if you're earning
$59,000 a year five years from now, it would feel like $50,000 a
year today. In 15 years, you'd have to make $84,000 a year for it
to feel like $50,000 a year by today's standards and basically,
that's what the chart shows you. If you go back to the chart on
shown on our "What Do You Need to Save to Retire Comfortably?"
chart, for a $50,000 income by today's standards, and retiring in
15 years, (that's $879 a month savings) would, at the time, give
you an $84,000 a year income. But remember, that $84,000 a year
income is 15 years from now and that would feel like $50,000 a year
today.
Total
Savings Chart
This
chart shows you the total of the assets you would have accumulated
based on the chart shown on our "What Do You Need to Save to
Retire Comfortably?" flyer. If you think about it, if for a
period of 15 years, you've saved $879 a month, you would have $598,000
15 years from now. That's pretty amazing because if you take a look,
$879 a month, which means you're putting in $10,548 a year, times
15 years, is only $158,220. So although you're only putting in $158,220,
over 15 years, it's worth pretty close to $600,000 and that's what
the magic of compound interest will do. The nice thing about this
is when you begin to take the money out year by year, you will never
touch principal. So long as you withdraw the money in monthly increments,
there will be interest earned on the balance remaining. This will
offset the effects of inflation. So in effect, you could actually
give yourself a cost of living increase or adjustment of 3.5% a
year from the date you decide to retire.
On the example we're using, you will have $50,000 a year by today's
standards or $84,000 per year 15 years from now. Each year, your
amount will be going up from that $84,000 a year by 3.5%, but it
will continually feel like $50,000 a year by today's standards.
In addition, having this asset will provide you with the ability
to give something to your heirs - something very substantial to
your heirs when you pass on - and that's kind of a nice feeling
as well. So you never touch principal. You have a benefit to give
your heirs and you always retain the same level of income. You will
have accounted for the effect of inflation.
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