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Posted by chip on October 19, 2006, 7:10 pm
I am a little confused on how to calculate TOTAL $ needed for retirement.
How do you include pensions and SS (and yes, I believe we have nothing to
fear, but fear itself) into the figure?
I have read a lot about having 20x your annual living expenses including
taxes as a reasonable goal to have at the beginning of retirement. Let's
say that is $100K/year, so I need $2M. However, if I count pensions and SS
are $75K/year x20=$1.5M, right there. So I need $500K in investments over
and above the pensions and SS or do I need $2M in investments alone. If
pensions and SS are for life ,shouldn't they be counted differently. If so,
what is their multiple?
Chip
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Posted by joetaxpayer on October 19, 2006, 9:13 pm
chip wrote:
> I am a little confused on how to calculate TOTAL $ needed for retirement.
> How do you include pensions and SS (and yes, I believe we have nothing to
> fear, but fear itself) into the figure?
>
> I have read a lot about having 20x your annual living expenses including
> taxes as a reasonable goal to have at the beginning of retirement. Let's
> say that is $100K/year, so I need $2M. However, if I count pensions and SS
> are $75K/year x20=$1.5M, right there. So I need $500K in investments over
> and above the pensions and SS or do I need $2M in investments alone. If
> pensions and SS are for life ,shouldn't they be counted differently. If so,
> what is their multiple?
>
> Chip
The order of the calculation is something like this;
Go to http://www.ssa.gov/ and calculate your expected benefit.
Find your company benefit manual, and do the same for pension.
Inflate your current salary to your retirement year, and subtract the SS
and pension. This would be the amount of income you need to replace.
A 100K/yr earner retiring now at 62 will get about $1440/mo or just over
17K/yr. Pension may be a small adder or completely provide what you need.
Say you calculate these two add to 30%. You need then to replace 70% of
your income and that would take 17.5X you final income at retirement.
(not sure where 20X is from, it takes 25X to replace at 100%).
I created a spreadsheet for this calculation, you can adjust the
numbers, or reload the sheet to clear the data.
http://www.joetaxpayer.com/spreadsheet.html
JOE
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Posted by speednxs on October 20, 2006, 9:41 am
If you only need an additional $25K per year, you only need to save for
this. $500,000 will last about 20 years, even adjusted for nominal
inflation. At retirement year 20 this expense will have grown to
$45,000.
JoeTaxpayer's example shows the power of compound interest. He only
has $521,000 at age 52, but $1,238,000 at age 62.
Spending down is the opposite of compound interest. Every year your
principle goes down and your expenses go up.
As usual you can only say: if I do this what happens given these rules.
Nobody can predict the future.
I always try to err on saving too much.
Congratulations for doing retirement planning and good luck in
retirement.
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Posted by FranksPlace2 on October 20, 2006, 10:04 am
chip wrote:
> I am a little confused on how to calculate TOTAL $ needed for retirement.
> How do you include pensions and SS (and yes, I believe we have nothing to
> fear, but fear itself) into the figure?
>
> I have read a lot about having 20x your annual living expenses including
> taxes as a reasonable goal to have at the beginning of retirement. Let's
> say that is $100K/year, so I need $2M. However, if I count pensions and SS
> are $75K/year x20=$1.5M, right there. So I need $500K in investments over
> and above the pensions and SS or do I need $2M in investments alone. If
> pensions and SS are for life ,shouldn't they be counted differently. If so,
> what is their multiple?
>
I believe the 20x is based on a 5% withdrawal rate from your
investments to cover living expenses (20 * .05 = 1). That come from an
analysis like this:
http://www.fpanet.org/journal/articles/2004_Issues/jfp0304-art8.cfm
So as pointed out above, if 30% of your living expenses come from
elsewhere, then your needed investment is 14x (14 * 0.05 = .7.)
Frank
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Posted by rick++ on October 20, 2006, 10:21 am
There are a bizillion such calculators on investor web sites these
days.
It sort of depends on your income. If you've been earning around
median wage ($46,000), social security will replaces about 40%.
If you make about twice that, then social security replaces about
25%. When you take in account not having to pay social security
tax and saving anymore, The necessary replacement income
is 37% to 52% between those two ranges. And the savings
to generate such is 7 to 12 times your income. Less if you
have any other pension.
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