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 Author: Ripper14 Number: of 74759 Subject: FV calculation help Date: 12/6/2010 1:08 PM
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 I'm having trouble trying to calculate the future value of an increasing investment. Here's my inputs:Current investment account value: \$40,000Current salary: \$80,000Yearly salary increase (est): 2%Current investment as % of salary: 5%Current employer match as % of salary: 5%Estimated investment acct yearly return: 7%What will be the value of the account be in 30 years?The part I'm having trouble with is the fact that the amount invested increases each year because the salary goes up. I can do the math on a constant investment, but can't figure out the math for an increasing investment. Any help out there?Thanks,ripper
 Author: pauleckler Number: 67798 of 74759 Subject: Re: FV calculation help Date: 12/6/2010 1:59 PM
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 It is fairly easy to create a model for this kind of investment calculation in a spread sheet (like Excell or QuattroPro).I'd start with year number in the first column, calculate the return from previous years balance at the interest rate in col 2, put salary in next column calculated from previous years salary at raise rate shown, and then this years 5% contribution, and % employers match. Add up all of this years increases in a subtotal column if you like and then add them to last years balance at end of year to get the end of year value.I would use the copy feature and a year no=last year no +1 and copy down for 30 rows to calculate year numbers.Then once formulas are set up right in the first row, copy them down for all 30 rows to get your final number.This essentially gives you a financial model of what the account should be worth (and what your salary should be) for the next 30 years. I did this back in 1983, and was surprised at how closely the real numbers tracked the calculation. It is fun to see if you are ahead of the curve or falling behind.
 Author: TwoCybers Number: 67799 of 74759 Subject: Re: FV calculation help Date: 12/6/2010 2:40 PM
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 Author: pauleckler Number: 67800 of 74759 Subject: Re: FV calculation help Date: 12/6/2010 2:56 PM
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 The other thing to remember is that \$1,232,633 is fully taxable at ordinary income tax rates (usually fed and state) unless you get a chance to convert to a Roth somewhere along the line.The sum is subject to manadatory distributions at age 70-1/2.So unless you have a magical tax strategy to avoid those taxes, its spending value in retirement should probably be reduced by 30% or so. And then you can factor in inflation (most expenses will double at least twice in 30 years).
 Author: Ripper14 Number: 67801 of 74759 Subject: Re: FV calculation help Date: 12/6/2010 3:01 PM
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 pauleckler-Thanks for clearing up my "duh" moment. I was trying to do it all in one cell using the financial formulas in Excel. Doing the calcs for each year takes care of the increasing savings problem, plus lets me track how close the actuals are to the estimates after however many years. Excellent idea.-ripper
 Author: Ripper14 Number: 67802 of 74759 Subject: Re: FV calculation help Date: 12/6/2010 3:21 PM
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 twocybers-Good point on the lump sum thing. I guess if I wanted more resolution I could run it monthly rather than yearly, but I guess inter-year differences don't make too much of a difference to me right now because the salary increase and coresponding savings increase typically only happen at the end of the year (for me). I suppose this will underestimate earnings a bit because of the interest gained during the year, but conservative is better.I hear you on points 1-3. I am shooting for 3-4M so I know I am quite short, but this instance is one of three accts I am working on so we'll see if I can get there. I hadn't heard the analogy you have in #1. That is great...I can use that in my job as we often work with averages. Regarding inflation, I'm assuming 3% in my final model, and only 2% wage increases so that will have me earning less close to retirement. Realistic? Maybe, maybe not, but conservative I hope. Thanks for the insights,-ripper
 Author: TwoCybers Number: 67803 of 74759 Subject: Re: FV calculation help Date: 12/6/2010 5:29 PM
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 Ripper I do not claim to have magic vision - but here is how I approached this issue. I said I could withdraw somewhere in the range of 3.5 to 3.75% and adjust for inflation. Some people will say more, a few much more. In this area choices have consequences and running out of money or taking a serious income haircut above age 75 is not something I care to face. If my withdraw rate is too damn conservative great - I can buy more computers and donate money to whomever. If my withdraw assumptions are too aggressive, I will have lots of company. You mentioned the lump sum payment assumptions I used - I am lazy. Yes your IRA contributions will happen through the year, but when that money is actually invested is another issue. There are studies that say putting money in the market at this month or that year in an election cycle gets you 0.X% more compounded return. In my view the assumptions have uncertainties, particularly out 10 years or more that greatly exceed any errors made by using annual vs monthly or even weekly payments.GordonAtlanta
 Author: Watty56 Number: 67804 of 74759 Subject: Re: FV calculation help Date: 12/6/2010 11:49 PM
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 It wasn't clear if the 2% assumption about future pay raises was for inflation or increasing salary in real dollars.If it wasn't for inflation then you might want to consider having a differnt rate as you get older. Many people have their real salary peak in their early 50's or so.Greg
 Author: gdett2 Number: 67805 of 74759 Subject: Re: FV calculation help Date: 12/7/2010 1:07 AM
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