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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: Re: Question of how much Date: 12/10/2004 5:17 PM
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Author: RCMX | Date: 12/9/04 7:47 PM | Number: 43488
A co-worker of mine asked me the other day...how much I think I needed to retire comfortably.

Thinking of this, I decided that it wasn't so much a solid $$$ amount, but rather to simply outpace the majority of others.

That said, I would believe if I read that the average American is saving at a rate of only 2%, that I need only save at a rate of say 10% to assure that I may have an affordable retirement.

I say this only because, I cannot imagine prices outstripping the "average consumer". After all, the market will only bare what somebody can pay for, right?

This statement says nothing of salary, but only as a percentage of savings. Lets just assume that average Joe has an average salary.

Does it make sense to think that all one needs to day is save at "more than an average rate" to be comfortable? Of course, it depends on your definition of comfortable.


I think there is a strong social message underlying what you have written. In a sense, I think you are right. If the average person only will have 'x' dollars to spend, that will force the whole economy to adjust to that level.

However, I think it will adjust only because of massive social programs provided by the government (er, provided by the people who take their retirement responsibilities seriously and save properly).

So, as a responsible citizen, I think you should plan to finance your own retirement. The way to do that is to figure out how much you need to spend each month to live in retirement, and add optional things you want to do or buy on top of that. Once you arrive at a monthly figure, multiply it by 12 to get the yearly figure.

How large a portfolio will you need to have to provide that annual amount?

Most studies show that historically you can draw about 4% per year (plus increases for inflation) from a properly diversified portfolio without depleting the portfolio. So, if you take your annual requirement and multiply it by 25, that will be the value you will need in your portfolio to support the 4% annual withdrawal.

Also, after you retire, several key costs decrease or stop. The biggest one is often the amount you save each month for retirement (because most people wait until the last minute to start saving for retirement). Next is social security taxes. Next is work clothes and transportation to and from work, and maybe you can get rid of a car. Most people find that once these costs are subtracted, they can live on around 70% of what they were making when they were working, without reducing their standard of living. Of course, 70% is just a rough guideline, and accurate living costs should always be calculated before retirement. 70% is a good enough guess to use for long range estimates.

Example:
You are working and earning $75,000 a year.

Using the 70% estimate, that means you will need $52,500 per year or $4375 per month to live on in retirement.

25 x $52,500 is $1,312,500.

So, you need $1.31 million in 20 years to support your $52,500 per year needs at a 4% annual withdrawal rate.

Now, let's assume that social security will pay you and your spouse a total of $1400 a month or $16,800 a year. This reduces your required drain on your portfolio from $52,500 a year to $35,700 a year. So, considering social security, you will need $35,700 x 25 or $892,500 in your portfolio to meet your living expenses at a 4% withdrawal rate.

The bottom line is:
If you have 20 years until retirement, and you have not started saving yet, in order to save $892,500, assuming 6% compounding, my BA-II calculator says you will need to save $1932 per month. That is 2.6% of your $75,000 salary.

You may also wonder how inflation will affect all this. Obviously salaries, social security (in some form), and costs will all go up. If you always save the same 2.6% from each month's pay, and your salary increases faster than inflation, you will more than compensate for inflation.

Note: If social security morphs into self-directed accounts, as it appears it will, you will need to invest these funds very carefully to assure you will have at least the future value equivalent to present day social security when you retire. I believe that if you do it right, you can have more.

Russ
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