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Author: mikemason323 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75777  
Subject: Making a Graduate Annuity Date: 4/28/2013 1:13 PM
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Hi everybody, I have a question I wish someone would help me with. It may even show you something that will allow you to retire sooner. My question is this, every time I read or asked retirement advisers how much I should save they say around $1 Million. Most people when they hear this say that it is impossible for them to save that much and put all their hopes on winning the lottery. Last year my wife and I spent about $32,000 on expenses. The S & P 500 has a 10 year load adjusted return of 8.12%. Likewise, the 10 year average inflation rate is 2.42%. I am using 10 year averages to mitigate the swings in the actual numbers. I want to set up my own annuity to pay expenses for retirement. Most annuities you buy take out a chunk of money for themselves. Although you can do the same thing with cash flows and NPV there is an easier way. I found this excel accounting equation by a genius named Timothy R. Mayes, Ph.D. for a graduate annuity which states:
=PV((1+B4)/(1+B3)-1,B5,-B2,0,0)/(1+B3)
You can copy and paste this equation into an excel spreadsheet and type the following numbers into the appropriate cells.
B2= Initial Cash Flow of $32,000 ,
B3=The Growth or Inflation Rate of 2.42%,
B4=The Discount Rate or S&P 500 10 year load adjusted return of 8.12%.
B5= Years the annuity will pay you. Since most will want to retire at 67 to get full social security benefits and the average life expectancy for 65 year old man is 17 years and for women 20 years, so let’s use 20 years. This is based on National Center for Health Statistics. Furthermore, hate to be a bearer of bad news but, only 2% of people live past 90 years according to the U.S Census Bureau publication: 90+ in the United States.
This gives me a present value (PV) retirement goal of $371,361. This is already about a third of what the retirement advisors recommend and is adjusted for inflation. But after I subtract out what Social Security will pay me, it will be much less. I went online to get the Social Security Statement for my wife and myself. Since we are retiring the same year this makes the math easier. However, in your case you may need to work for or save the difference for the years you are not both retired in addition to the annuity. I know it is morbid but, plan for the contingency that one of you may die resulting in a loss of the social security benefits. Added together it is $29,496 per year in benefits which leaves $2,504 per year in expenses. Plugging $2,504 into cell B2 of the above equation give me an annuity with the present value of $29,059. This retirement savings goal of $29,059 is only 3% of the $1,000,000 suggested for retirement! If market fluctuation during recessions makes you nervous you could increase this by 37.02% equaling $39,816 to match even the worst one year return. But you may be asking about taxes? I just read that 2013 taxes for long term investments are 0% if the income bracket is below $36,250. Which is my aim anyway. However, 15% tax rate from $36,250 to $400,000 range is still not that bad. I plan to diversify and fully invest and ride out the recessions and recoveries only selling what I need to live on. Of course you will have to sell more stock in the down years to get the $2,504 but in good years you will have to sell much less. I plan to use the concept of dollar-cost averaging but instead of buying, I will be selling over time to avoid selling at the very bottom and putting it in a money market fund. Sure it takes something not to panic and sell low, but I have been able to resist the urge the last several recessions. The returns should average out over the long run. This is what the S & P 500 10 year load adjusted return of 8.12% means right? What expenses beside health insurance would there be. I want to get my numbers right before making any costly mistakes. This is my attempt at submitting it to peer review. Any constructive criticism would be greatly appreciated. If you are thinking of doing the same thing, please run the numbers past a professional. Thank You!
Following is information you may want to consider.
S&P 500 Index
Performance Overview
Morningstar Return Rating: 4.00
Year-to-Date Return: 6.58%
5-Year Average Return: 4.85%
Number of Years Up: 29
Number of Years Down: 7
Best 1 Yr Total Return (1998-12-31): 28.62%
Worst 1 Yr Total Return (2008-12-31): -37.02%
Best 3-Yr Total Return (N/A): 14.24%
Worst 3-Yr Total Return (N/A): -14.60%

Load Adjusted Returns
1-Year: 13.30%
3-Year: 13.33%
5-Year: 4.85%
10-Year: 8.12%
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