Your retirement could easily last 25 to 40 years, but most people spend more time planning their next vacation than they do planning their retirement! Without a plan, you are kidding yourself about your intentions to retire. The road to hell is paved with good intentions.
This page discusses the following subjects:
How much will my retirement cost?
Retire Come Hell or Highwater!
How much will my retirement cost?
You can calculate what it would cost to pay for the retirement that you want at today’s prices. Between now and the date of your retirement, inflation will increase the cost of your retirement lifestyle by 3.1% because that is the equivalent rate of inflation since 1926. What costs $1000 per month now might cost $3600 by the time that your retire.
Unfortunately, inflation does not stop after you retire. In order to estimate the cost of your retirement, you need to account for inflation between retirement and your eventual death, as well as between now and retirement.
What your grandfather received as a pension from his employer is called an Immediate Annuity. You can buy an Immediate Annuity from most Insurance companies. The Insurance company guarantees those payments for life, however, the payments do not increase to offset inflation.
In order to offset inflation after you retire, we estimate what it would cost to supplement the Immediate Annuity with additional guaranteed income so that your total monthly retirement income increases by 3.1% per year for every year of your retirement.
There are 2 tables below representing your retirement age as 62 or 65. The tables assume that you want a retirement which costs $1000 per month at your current age. Look up your current age, and read across the table for the costs per thousand that you need.
Each year, Social Security projects your Social Security benefits. Theoretically, that Social Security income will increase to offset inflation. Although they do not use the general rate of inflation in order to calculate the increase in Social Security each year, it is better than nothing.
There is a separate table which estimates the lump sum value of your future Social Security benefits. The estimate assumes that you have a $1000 Social Security benefit and estimates the lump sum equivalent of that future monthly benefit. Divide your projected monthly Social Security benefit by $1000 and multiply that result by the lump sum amount in the Table. Subtract that result from the estimated cost of your retirement from the Age 62 & 65 Tables in order to determine your net required retirement savings.
Retire at Age 62 Accumulation
Inflation Projected $1,000.00 Current per month Age Male Female Couple $3,604.66 20 $1,351,011.01 $1,367,523.95 $1,417,206.93 $3,496.27 21 $1,310,388.96 $1,326,405.38 $1,374,594.50 $3,391.15 22 $1,270,988.32 $1,286,523.16 $1,333,263.34 $3,289.18 23 $1,232,772.37 $1,247,840.12 $1,293,174.92 $3,190.28 24 $1,195,705.50 $1,210,320.19 $1,254,291.87 $3,094.36 25 $1,159,753.16 $1,173,928.41 $1,216,577.95 $3,001.32 26 $1,124,881.82 $1,138,630.85 $1,179,998.01 $2,911.07 27 $1,091,058.99 $1,104,394.62 $1,144,517.96 $2,823.54 28 $1,058,253.14 $1,071,187.80 $1,110,104.71 $2,738.65 29 $1,026,433.70 $1,038,979.44 $1,076,726.20 $2,656.30 30 $995,571.00 $1,007,739.51 $1,044,351.31 $2,576.43 31 $965,636.27 $977,438.91 $1,012,949.86 $2,498.96 32 $936,601.62 $948,049.38 $982,492.59 $2,423.83 33 $908,439.98 $919,543.53 $952,951.11 $2,350.95 34 $881,125.10 $891,894.79 $924,297.87 $2,280.26 35 $854,631.53 $865,077.39 $896,506.18 $2,211.70 36 $828,934.56 $839,066.33 $869,550.13 $2,145.19 37 $804,010.24 $813,837.37 $843,404.59 $2,080.69 38 $779,835.34 $789,367.00 $818,045.19 $2,018.13 39 $756,387.34 $765,632.39 $793,448.29 $1,957.45 40 $733,644.36 $742,611.44 $769,590.97 $1,898.59 41 $711,585.22 $720,282.68 $746,450.99 $1,841.51 42 $690,189.35 $698,625.29 $724,006.78 $1,786.14 43 $669,436.81 $677,619.10 $702,237.42 $1,732.43 44 $649,308.25 $657,244.52 $681,122.62 $1,680.34 45 $629,784.92 $637,482.56 $660,642.69 $1,629.82 46 $610,848.61 $618,314.80 $640,778.56 $1,580.81 47 $592,481.68 $599,723.38 $621,511.70 $1,533.28 48 $574,667.00 $581,690.96 $602,824.15 $1,487.18 49 $557,387.98 $564,200.73 $584,698.49 $1,44.46 50 $540,628.49 $547,236.41 $567,117.84 $1,399.09 51 $524,372.93 $530,782.16 $550,065.80 $1,357.02 52 $508,606.14 $514,822.66 $533,526.48 $1,316.22 53 $493,313.43 $499,343.02 $517,484.46 $1,276.64 54 $478,480.53 $484,328.83 $501,924.79 $1,238.26 55 $464,093.63 $469,766.08 $486,832.97 $1,201.02 56 $450,139.31 $455,641.20 $472,194.93 $1,164.91 57 $436,604.57 $441,941.03 $457,997.02 $1,129.89 58 $423,476.79 $428,652.79 $444,226.01 $1,095.91 59 $410,743.73 $415,764.11 $430,869.07 $1,062.96 60 $398,393.53 $403,262.96 $417,913.75 $1,031.00 61 $386,414.68 $391,137.69 $405,347.96
Retire @ Age 65 Accumulation
Inflation | ||||
Projected | ||||
$1,000.00 | Current | |||
per month | Age | Male | Female | Couple |
$3,950.39 | 20 | $1,448,430.13 | $1,464,484.51 | $1,526,955.97 |
$3,831.61 | 21 | $1,404,878.88 | $1,420,450.54 | $1,481,043.62 |
$3,716.40 | 22 | $1,362,637.13 | $1,377,740.59 | $1,436,511.76 |
$3,604.66 | 23 | $1,321,665.50 | $1,336,314.83 | $1,393,318.87 |
$3,496.27 | 24 | $1,281,925.80 | $1,296,134.65 | $1,351,424.71 |
$3,391.15 | 25 | $1,243,380.99 | $1,257,162.61 | $1,310,790.21 |
$3,289.18 | 26 | $1,205,995.14 | $1,219,362.38 | $1,271,377.51 |
$3,190.28 | 27 | $1,169,733.40 | $1,182,698.72 | $1,233,149.86 |
$3,094.36 | 28 | $1,134,561.98 | $1,147,137.46 | $1,196,071.64 |
$3,001.32 | 29 | $1,100,448.09 | $1,112,645.45 | $1,160,108.28 |
$2,911.07 | 30 | $1,067,359.93 | $1,079,190.54 | $1,125,226.27 |
$2,823.54 | 31 | $1,035,266.67 | $1,046,741.55 | $1,091,393.08 |
$2,738.65 | 32 | $1,004,138.38 | $1,015,268.24 | $1,058,577.19 |
$2,656.30 | 33 | $973,946.05 | $984,741.26 | $1,026,748.00 |
$2,576.43 | 34 | $944,661.54 | $955,132.16 | $995,875.85 |
$2,498.96 | 35 | $916,257.56 | $926,413.35 | $965,931.96 |
$2,423.83 | 36 | $888,707.62 | $898,558.05 | $936,888.42 |
$2,350.95 | 37 | $861,986.05 | $871,540.30 | $908,718.16 |
$2,280.26 | 38 | $836,067.95 | $845,334.92 | $881,394.91 |
$2,211.70 | 39 | $810,929.14 | $819,917.47 | $854,893.22 |
$2,145.19 | 40 | $786,546.21 | $795,264.28 | $829,188.38 |
$2,080.69 | 41 | $762,896.42 | $771,352.36 | $804,256.43 |
$2,018.13 | 42 | $739,957.73 | $748,159.42 | $780,074.14 |
$1,957.45 | 43 | $717,708.76 | $725,663.84 | $756,618.95 |
$1,898.59 | 44 | $696,128.77 | $703,844.65 | $733,869.01 |
$1,841.51 | 45 | $675,197.64 | $682,681.53 | $711,803.11 |
$1,786.14 | 46 | $654,895.87 | $662,154.73 | $690,400.69 |
$1,732.43 | 47 | $635,204.53 | $642,245.13 | $669,641.80 |
$1,680.34 | 48 | $616,105.27 | $622,934.17 | $649,507.08 |
$1,629.82 | 49 | $597,580.28 | $604,203.85 | $629,977.77 |
$1,580.81 | 50 | $579,612.30 | $586,036.71 | $611,035.66 |
$1,533.28 | 51 | $562,184.58 | $568,415.82 | $592,663.10 |
$1,487.18 | 52 | $545,280.87 | $551,324.76 | $574,842.97 |
$1,442.46 | 53 | $528,885.42 | $534,747.58 | $557,558.65 |
$1,399.09 | 54 | $512,982.95 | $518,668.85 | $540,794.04 |
$1,357.02 | 55 | $497,558.63 | $503,073.57 | $524,533.50 |
$1,316.22 | 56 | $482,598.09 | $487,947.20 | $508,761.88 |
$1,276.64 | 57 | $468,087.38 | $473,275.66 | $493,464.48 |
$1,238.26 | 58 | $454,012.98 | $459,045.25 | $478,627.04 |
$1,201.02 | 59 | $440,361.76 | $445,242.73 | $464,235.74 |
$1,164.91 | 60 | $427,121.01 | $431,855.22 | $450,277.15 |
$1,129.89 | 61 | $414,278.38 | $418,870.24 | $436,738.26 |
$1,095.91 | 62 | $401,821.90 | $406,275.69 | $423,606.46 |
$1,062.96 | 63 | $389,739.97 | $394,059.84 | $410,869.50 |
$1,031.00 | 64 | $378,021.31 | $382,211.29 | $398,515.52 |
Lump Sum Equivalent $1000 per month Social Security Benefit
Male Female Couple Retire Age 62 311,600 316,181 329,964 65 277,174 281,238 297,052
Example: Consider John and Mary Smith
John is 43 and Mary is 40
They have a household income of $50,000
They want the same income in retirement - $4667 per month
They want to retire when john is 65
Look up in the age 65 Table for the couple factor for age 43.
A $1000 per month retirement requires $756,619.
We multiply that by $4 667/$1000 to determine that the Smiths need $3,152,831 when John reaches age 65.
$4667/$1000*$756,619 = $3,152,831
John’s wage history will produce a Social Security benefit of $1273 per month at age 65
Mary’s wage history will produce a Social Security benefit of $1056 per month at age 65
They have combined Social Security benefit of $2,329 per month.
The factor for determining the lump sum equivalent of their Social Security benefit is $297,052 (retirementy @ age 65 couple)
Again, we multiply
$2329/$1000 * $297,052 to obtain $691,834 = the Lump sum Equivalent for their Social Security benefit.
In order to pay for the retirement that they want, the Smiths need $3,152,831, but they will have $691,834 worth of Social Security benefits.
During their working lives, the Smiths need to accumulate $2,460,997
$3,152,831 - $691,834 = $2,460,997
Some people will look at those numbers and say I can do it for less. They are daydreaming!
Most people have no respect for Immediate Annuities. They look at the theoretical internal rate of return, and say “I can do better”. However, they cannot even duplicate what the Insurance company guarantees!
An Immediate Annuity is a mathematical formula. There is no real investment or combination of real investments that will duplicate what that formula assumes in its calculation. The formula assumes that the assets do not fluctuate in value, and that the rate of return does not change during the length of the contract.
No one will guarantee principal and interest for more than 10 years.
The Insurance company cannot find a guarantee of interest and principal for more than 10 years either. However, the Insurance company makes the promise according to the mathematical formula and creates enough reserves in excess of that obligation that it can make good on the promise.
If you still feel that “you can do better”, you are assuming that you can use Systematic Withdrawal and do better. Click on the DON’T tab above and read the article about Systematic Withdrawal. I do not think you would prefer bankruptcy.
Retire Come Hell or High Water!
Right now, many people are complaining that they have to postpone their retirement as a result of the stock market decline. Nonsense! They have to postpone their retirement because they did not plan for the current financial crisis. Market fluctuations occur all the time. Significant "corrections" occur frequently. Major declines occur often enough that you have to expect that one will happen the day that you retire!
Twenty years ago I did not know that there would be a financial crisis today, but I did know how to plan for your retirement come hell or high water. If those people had planned correctly, they would be retiring on schedule. Their stock assets would be worth a lot less, but that would not have stopped them from retiring on schedule. That is why you do your Financial Planning!
In order to guarantee that your retirement will start when you want, you have to guarantee that you will have the money to start your retirement on that date. While no one could have predicted the stock market decline, and the subsequent financial crisis, anyone could have prepared for that possibility. The stock market fluctuates. Sometimes there are “corrections” as much as 15%, but there are also major declines up to 50%- 60%. You have to be prepared for the worst
The average major stock market decline lasted 9 years:
1929 - 1937 8 years
1937 - 1945 9 years
1966 - 1977 11 years
2000 - 2007 9 years
You have to guarantee that you will have at least 9 years of income on the day that you retire. That is not a lavish retirement income, but enough to pay for what you call comfortable. Figure out what that necessary income is. Subtract your Social Security income because that is already guaranteed. Divide that result by the amount that you can save for retirement every month. That is the number of months before your intended retirement date that you have to start saving for this guaranteed retirement amount.
You will notice that I did not mention interest earned while the money accumulates or while you draw down the account. Interest rates could also be low at the same time. When things go wrong, everything goes against you. Any excess accumulation will be extra pocket money for your retirement.
I also did not mention income taxes. If your other taxable income plus half of your Social Security exceeds the threshhold, you will have to pay taxes on your Social Security and the interest on this guaranteed account. In 2008, the threshold was $32,000 for married tax returns, and $25,000 for Single or Head of Household tax returns.
Your first complaint will be “ but what if the stock market does not tank, and I miss out on all those profits?
In order to make an omelet, you have to break a few eggs. All those people who were fully invested in the stock market and suffered through the decline now have to postpone their retirement, and they do not know how long the recovery will take! I have a client who was supposed to retire in early 2007, but a 10% stock market “correction” in February made him postpone his retirement until June 2007. If you do as I have described, you will be prepared for anything.
Your second complaint will be “but what if the market is in good shape, and I do not need that money?” No matter what happens in the stock market, you still need money to buy the guaranteed cash flow that allows you to pay your retirement bills. You will use the guaranteed account to help pay for your guaranteed cash flow during your retirement.
Think of it this way. It is your money, and you can do whatever you want until you do not have enough to pay your bills. Then you have to do whatever someone else tells you to do. How many 80 year olds do you see working at a fast food place?
How relaxed would your retirement be if you turned on the evening news and heard that your life savings just declined another 2 % today? Hearing that kind of news when you are working and have a pay check is bad enough. In retirement, that is pure heartburn!
Remember Murphy's Law: "If something can go wrong, it will go wrong exactly when you can least afford the problem!"