No. of Recommendations: 3
Hi Buck4U
Its a time-value-of-money TVM) calculation. Standard CPA, CFA and CFP stuff. Here's an example (note: these calcs are easily done on a financial calculator)

A 24 year old gets an inheritance from the sale of his recently deceased parents home: his final (post expenses) inheritance is $100,000. His question is how much of this should he save for his future retirement, as his parent's will encouraged him to save...rather than spend....his inheritance, and he'd like to save as much as he can now. He has two more years to pay on his student loans and has no other outstanding financial need.

There are several assumptions that need to be made: Expected retirement age: 67. Savings required at 67 based on 2.5% annual wage-inflation growth of current earnings of $50,000/yr as a high school teacher. Average annual expected rate of investment return on a 2085 Target Date fund is 8% to age 67 and then drops to an average of 5% over retirement years due to conservative allocation, with annual inflation assumed at 3%. Social Security is not factored into the calculation nor a pension he is not confident will be there at age 67. Life expectancy is to age 90. It is assumed he'll require 100% of his final working year income in retirement, which calculates to $144,580 for the first retirement year, that will hence grow by 3% per year. The lump sum target for age 67 will be $2,661,500 (I know, that sounds outrageous for a modest income career...but $1MM sounded equally outrageous in 1981). How much would he need today to reach this? About $97,300.

Now let's say he wants to keep out $50K to use as a downpayment to buy his first home, and will invest the other $50K for his retirement. How much would he have to save each year to still meet his lump sum need at first retirement year? $3,950 level annual savings rate.

Fun with TVM

BruceM
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