Thumb-sucked amounts, percentages of final salary, 4% rules and calculators that predict your retirement capital on today’s dollars are likely to send you straight back to work at the very time you should be enjoying your twilight years. My retirement calculator is the only one on the internet that properly calculates how much money you need to retire on. It takes account of inflation from the present moment whilst also including inflation adjusted income escalations during retirement. Never again will you have to worry about outliving your money.
Have you ever tried throwing darts blindfolded?
Well it’s the same as listening to garbage like:
- 12 times final pay at age 65
- 75% of pre-tax income, or
Saving for retirement is not a hit and miss game.
You Need More Money When You Retire - Not Less!
Most people wake up and smell the coffee way too late.
Contrary to all the flawed advice you’ve been reading, you need more money during retirement than you were earning just prior to it.
When you work, you have money but no time.
But when you retire, you have time and no money.
At least, that’s how things turn out for the bulk of the population.
According to GoBankingRates, 42% of Americans will retire broke.
I’ll take that a step further.
By listening to self professed experts who have no experience or qualifications in the retirement planning arena and resort to thumb-sucking how much money you need to retire, the probability of becoming broke during your retirement is pretty high.
There’s an article on the internet that refers to a 38 year old male (let’s call him John) who built up $1m and then retired.
Wow! Look how easy it is.
All you apparently need to do is:
- Automate your finances.
- Build up $1m.
- Withdraw 4% for the rest of your life.
- Live happily ever after.
There’s only one problem.
John’s retirement has never stood the test of time.
How was $1m arrived at?
Where does a 4% withdrawal rate come from?
What’s the expected rate of return?
Read my bio. Check out my experience.
Here’s why I believe ….
It Can Never Work
There’s something missing.
Something so important that overlooking it is tantamount to patching the San Andreas fault line with bubble gum and believing it will never rupture.
American athlete, Sam Ewing defined it as, “… when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair”.
Inflation slowly erodes the purchasing power of your dollars, but it’s like a silent cancer so most people don’t notice its effects until it’s too late.
According to Trading Economics, US inflation has averaged 3.27% from 1914 to 2018.
And according to data published by Macrotrends, the Dow Jones Industrial Average has achieved a compound annual growth rate of 3.96%, from 2000 to 2018.
World life expectancy can be viewed on Wikipedia. For the USA, male life expectancy is just short of 77 and females just short of 82.
My calculations below project to age 85.
Applying these figures to John’s example gives us a better sense of reality.
If John wants his income to keep abreast with inflation whilst preserving all of his capital to age 85, he needs a to invest $1,930,796 at the outset.
In short, the income of $40,000 will increase each year in line with inflation (3.27%), whilst the original capital will be kept in tact.
Alternatively John could invest an amount of $1,619,609 but drawing the same income would deplete the capital to $0 by age 85.
The only problem with this second option is that, whilst it requires a bit less capital, should John live a day longer than 85, he’ll be more than knee deep in the shit. Capisce?
Clearly, it’s worth building up the extra $311,187 in order to protect the capital over life his expectancy.
Without adjusting the income for inflation, its present value (purchasing power) reduces over the years to:
- $32,949 in 5 years
- $27,126 in 10 years
- $22,339 in 15 years
- $18396 in 20 years
In this event, John will either have to [continually] reduce his standard of living or go back to work!
Either way, it wouldn’t be easy for him.
Another factor that hasn’t been considered by John is ….
Income Withdraws During Poor Market Conditions
Either option mentioned above may hold up just fine provided all of the factors taken into account remain optimal.
But what if they don’t.
Yes, markets always grow over time, but short term volatility can have disastrous effects.
If income withdrawals are taken at times when growth is lower than the rate used in the above retirement projections, John’s capital will slowly erode.
And don’t for a second think that it can’t happen.
It can and it does. I’ve seen it first hand.
Between January 2018 and March 2018, the Dow Jones Industrial Average index dropped by -3.99% compound per year.
Any income withdrawals during this time would severely affect the capital balance.
Consider this example: John starts out with $1,930,796 in mid December 2017. On 1 January 2018 he draws down his first year’s income of $40,000, leaving a remaining amount of $1,890,796. (For this example I am assuming no capital growth for the last 2 weeks in December). By the end of March 2018, his balance is $1,736,903. He has lost 10.04% of his capital in one hit!
From March 2018 to July 2018, the market was flat (as can be seen in the graph).
Granted, the market comes back up to the original level by October 2018, but it takes 3 months to recover, where after it is followed by another downturn.
So he lands up losing capital immediately, which is then followed by another 4 months of virtually no growth at all. In his first year of retirement, the recipe has already flopped, leaving John on a back foot.
And if that’s not bad enough, imagine what another recession (like 2008 or even milder for that matter) would do to his capital. It would be far more crippling.
So Let's Sum Up John's Financial Plan - Realistically
In the first instance John hasn’t catered for inflation so his $40,000 yearly income will be worth $18,396 by the time he gets to age 58 (20 years).
Secondly, the original amount invested ($1m) is way too low to even think of providing income escalations that do keep abreast of inflation.
If John does take yearly income escalations (at 3.27% per year) in order to maintain the purchasing power of what $40,000 is worth today, the original $1m will whittle down to $540,297 by the time John gets to age 58.
And to add fuel to the fire, by the time John gets to age 65, all that remains (after drawing the then yearly income) is $23,487.
The calculator below shows this clearly.
Now he’s really in the poo, isn’t he?
Well, if John made $1m by age 38, then it wouldn’t have taken very long to make a second $1m, would it?
The first million is always the hardest to make.
If John had any financial sense, he would have deferred his early retirement for couple of years and taken it when he was in a position to do so. Let this be a lesson to ….
Be Very Conservative With Your Calculations
Naturally, much depends on how and where your money is invested.
The above example assumes that John’s money is invested in the industrial sector.
Because the Dow Jones Industrial Average (DJIA) is seen to be the grandfather of all stock indices (in the US) and is a measure of the overall health of the stock market, I don’t believe it’s prudent to deviate from that.
Yes, the DJIA returned 28.08% from January to December of 2017 but this is certainly no measure of long term performance.
And retirement is not a time for speculation but consolidation.
If the market is growing at 3.96% per year it’s really not prudent to withdraw 4% per year, is it?
There’s just no room to cater for short term volatility or a possible recession.
Now I’m not saying that one cannot achieve a more substantial rate of return, but greater returns are commensurate with greater risk.
Can you see why there’s no one size fits all approach to retirement?
Here's A Calculator To Work Out How Much Money You Need To Retire On
At the beginning of this post I promised to show you how to calculate how much money you need to retire.
Well, it’s a pretty complex calculation, especially if you want to cater for inflation.
And, with the exception of a few select CFP’s, most financial planners don’t even know how to do this calculation.
Other calculators I’ve seen on the internet are completely flawed!
So, I’ve embedded an interactive calculator in the form of an Excel spreadsheet that you can play around with.
I am an ex CFP (certified financial planner) with a Postgraduate qualification in financial planning and I spent over 30 years in the retirement planning industry, so you can trust that this calculator is 100% accurate and is the only one on the internet that will properly calculate how much money you need to retire.
If you click on each (grey) cell, you’ll see a small comment box to the top right. Click on that for instructions and enter your figures accordingly. My specialized retirement calculator will show you how much money you need to retire if you wish to preserve capital over your life expectancy or deplete it to zero over the same period.
PLEASE USE COMMAS WHEN ENTERING DECIMALS – (SORRY MICROSOFT GLITCH)
Now that you’ve had a chance to play around with some figures, you need to establish how you’re going to achieve your retirement goals.
Up until now I’ve spoken about investment.
So the burning question is, how much money do you need to invest in order to arrive at the figure you think you’ll need to retire on, based on the calculation you’ve just done?
You may be in for ….
The Fright Of Your Life
Now each of our circumstances are different, and as I already mentioned, there’s no “one size fits all” solution.
I’m going to show you two different scenarios using two different rates of return, purely as an example to illustrate the sensitivity of the figures.
The projection assumes that your current annual income must be retained during retirement, so no specific withdrawal rate is used.
- A 30 year old individual
- Looking to retire at age 60
- Assumed Life expectancy: 85 years of age
- With a current annual income of $60,000 (increasing at the inflation rate to age 60)
- Income escalation 3.27% (in line with inflation)
- Assuming a 3.96% compound annual growth rate (projection 1) and 5.5% (projection 2)
- And an inflation rate of 3.27%
You can either invest a level amount over the term to retirement or start lower and escalate the contribution yearly.
That’s why there are 2 calculations for each projected growth rate and are color coded to make it easy to read and compare the figures of each projection.
Projection 1 (3.96% return)
Using the retirement calculator above, the capital required at retirement age is:
- $5,859,222 (capital preservation option).
- Level investment required to achieve 1. above: $8474 per month.
- Escalating (4% per year) investment required to achieve 1. above: $5581 per month initial contribution.
- $3,640,090 (no capital preservation).
- Level investment required to achieve 2. above: $5264 per month.
- Escalating (4% per year) investment required to achieve 2. above: $3136 per month initial contribution.
Projection 2 (5.5% return)
Using the worksheet above, the capital required at retirement age is:
- $4,180,227 (capital preservation option).
- Level investment required to achieve 1. above: $4575 per month.
- Escalating (4% per year) investment required to achieve 1. above: $2845 per month initial contribution.
- $3,084,031 (no capital preservation).
- Level investment required to achieve 2. above: $3375 per month.
- Escalating (4% per year) investment required to achieve 2. above: $2099 per month initial contribution.
Wow. That’s a real blower!
For an individual earning $60,000 per year, gross, this is more than an entire salary.
Please don’t shy away from investing for your retirement because the figures look unbelievable.
While you’re still young you can afford to take on a higher level of risk and therefore, you may be able to invest in portfolios that perform better than 3.96% compound annual growth growth.
According to Yahoo, the S&P 500 has achieved a compound annual growth rate of 6.93% from January 1998 to Jan 2018. That already starts to make a difference.
But there’s also another way to ….
Supplement And Generate Passive Income For Your Retirement (And Now)
Most people who read this post are also looking for ways to make more money.
If you read my article about how to make money and live and retire rich, you’ll see that chipping away at expenses is not a real way to make money.
I certainly support being financially responsible but investing a few pennies that you may be able to save can’t ever make you enough money to be meaningful.
Now you may not be ready for this suggestion (yet) but an online business is a great way to start generating passive income streams.
And because it’s such a great way to make money for the present and the future, I thought it a good idea to open your mind to it.
You could start an online business as a side gig and slowly transition yourself into it on a full time basis.
As it grows, you’ll discover that you can automate the business so that it generates income without you having to be physically present.
And once you build up a flow of passive income, it’s there forever.
Now there’s a retirement solution that works!
Don’t leave without getting your FREE retirement calculator that includes yearly capital projections.
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