How to calculate exactly how much money you'll have by retirement?

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shanebagel
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How to calculate exactly how much money you'll have by retirement?

Post by shanebagel » Tue May 14, 2019 2:08 pm

I invest in VTTSX which is a 2060 target retirement date fund through vanguard. What should I use as a percentage in my calculations? I have been using %7, as the market returns about %10 which adjusted for inflation is 3%? Thanks!

Silence Dogood
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Re: How to calculate exactly how much money you'll have by retirement?

Post by Silence Dogood » Tue May 14, 2019 2:12 pm

Investing would be much easier if we knew in advance what our returns would be.

You have chosen an excellent fund. Keep contributing and stay the course!

Topic Author
shanebagel
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Re: How to calculate exactly how much money you'll have by retirement?

Post by shanebagel » Tue May 14, 2019 2:19 pm

Thanks! Haha I totally feel that. Do you think that this is a good assumption I've made as far as actually calculating how much money is needed? How much do you contribute yearly if you don't mind me asking.

fyre4ce
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Re: How to calculate exactly how much money you'll have by retirement?

Post by fyre4ce » Tue May 14, 2019 2:22 pm

You can use the “future value” function in Excel and other financial calculators. Let’s say you have $100,000 saved in your 401k today, and expect to make annual maximum contributions. You expect investments to grow at 7% after inflation and plan to retire in 30 years.


=FV(7%, 30, -19000, -100000)

Negative signs denote that it’s money you pay out (contribute). Value should be positive.

A target date fund will not give 100% stock-like returns for the whole time you own it. You could estimate lower average return, say, 5% real. Or if you want more accuracy, you'll have to use a spreadsheet.

Edit: my bad, I didn't see you were asking about percentages in particular. I'll leave the FV note for other's benefit though. For my analyses, I assume 6% real til age 50, 4% from 50-65, and 3% 65+.
Last edited by fyre4ce on Tue May 14, 2019 3:36 pm, edited 2 times in total.

k3vb0t
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Re: How to calculate exactly how much money you'll have by retirement?

Post by k3vb0t » Tue May 14, 2019 2:26 pm

My personal estimate is 8% per year before inflation. To keep the math simple I just make the 8% per year assumption, get to a dollar amount, and then factor in 3% inflation. It's not as simple as just 8% - 3% = 5% per year, but that's still a decent ballpark estimate. (You use the FV and PV functions in Excel... the FV or Future Value to figure out what it would be worth in actual dollars the PV/present value for what that money is worth today.)

Granted, that isn't 8% every year exactly... could be 8% this year, -15% next year, +30% the following year, etc.

All you can do is try to max out your contributions each year, generate multiple streams of pre or post-retirement income (pre: side gigs, starting a side business, etc., post: social security, pension, etc.), and hope for the best.

protagonist
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Re: How to calculate exactly how much money you'll have by retirement?

Post by protagonist » Tue May 14, 2019 2:26 pm

Don't bother trying to calculate, Shane. We know about as much about the economic state of the world in 2060 as we do about life on other planets.

You are probably invested in a good fund. Just continue saving as much as you can while still enjoying life while you are young (you never know when it will end for you....it could happen before 2060).

When you decide you want to retire and decide you can afford it, you will. I can almost guarantee your thinking process will be different in 2060 than it is now. I'm 66. If somebody 41 years ago told me (accurately) what my life would be like today (including how much money I would have as well as almost everything else about my life), I would have nearly died laughing.
Last edited by protagonist on Tue May 14, 2019 2:33 pm, edited 5 times in total.

MathWizard
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Re: How to calculate exactly how much money you'll have by retirement?

Post by MathWizard » Tue May 14, 2019 2:27 pm

I use 4% real, and do all calculations in real (inflation adjusted) dollars.
I used to use 6%, but scaled back since 2000.

Exactly is not possible, but I believe 4% real is conservative enough. Being a little low on the rate of return
is safer than too high.

longinvest
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Re: How to calculate exactly how much money you'll have by retirement?

Post by longinvest » Tue May 14, 2019 2:34 pm

shanebagel wrote:
Tue May 14, 2019 2:08 pm
I invest in VTTSX which is a 2060 target retirement date fund through vanguard. What should I use as a percentage in my calculations? I have been using %7, as the market returns about %10 which adjusted for inflation is 3%? Thanks!
I don't know exactly how much money I'll have by retirement. But, I aim to balance accumulation-time spending with retirement-time spending. So, I save money and adjust over time to how big my portfolio grows using the yearly calculations outlined in this post. If you'd like so, I would be willing to help you apply similar calculations to your own situation and portfolio choice.
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

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Re: How to calculate exactly how much money you'll have by retirement?

Post by jbranx » Tue May 14, 2019 2:43 pm

{Topic is now in Personal Investments}

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willthrill81
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Re: How to calculate exactly how much money you'll have by retirement?

Post by willthrill81 » Tue May 14, 2019 2:49 pm

MathWizard wrote:
Tue May 14, 2019 2:27 pm
I use 4% real, and do all calculations in real (inflation adjusted) dollars.
I used to use 6%, but scaled back since 2000.

Exactly is not possible, but I believe 4% real is conservative enough. Being a little low on the rate of return
is safer than too high.
I agree. For a target date fund, 4% seems to be sufficiently conservative.

OP, you should not rely on the U.S. stock market's average historic real return of 7% for several reasons, one of which is because all target-date funds have some exposure to bonds, which tend to return significantly less than stocks, and this exposure increases over the life of the fund.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

LiterallyIronic
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Re: How to calculate exactly how much money you'll have by retirement?

Post by LiterallyIronic » Tue May 14, 2019 2:49 pm

MathWizard wrote:
Tue May 14, 2019 2:27 pm
I use 4% real, and do all calculations in real (inflation adjusted) dollars.
I used to use 6%, but scaled back since 2000.

Exactly is not possible, but I believe 4% real is conservative enough. Being a little low on the rate of return
is safer than too high.
I always confuse "real" and "nominal." I use 4% in my projections, too, but I don't know if it's real or nominal. I assume that if I have $100 this year, then I'll have $104 next year, $108.16 the next year, and so on. Just straight up 4% return every year.

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willthrill81
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Re: How to calculate exactly how much money you'll have by retirement?

Post by willthrill81 » Tue May 14, 2019 3:11 pm

LiterallyIronic wrote:
Tue May 14, 2019 2:49 pm
MathWizard wrote:
Tue May 14, 2019 2:27 pm
I use 4% real, and do all calculations in real (inflation adjusted) dollars.
I used to use 6%, but scaled back since 2000.

Exactly is not possible, but I believe 4% real is conservative enough. Being a little low on the rate of return
is safer than too high.
I always confuse "real" and "nominal." I use 4% in my projections, too, but I don't know if it's real or nominal. I assume that if I have $100 this year, then I'll have $104 next year, $108.16 the next year, and so on. Just straight up 4% return every year.
Historically, 4% real is a conservative, but not overly so, estimate of long-term returns for stocks. In 90% of the historic 30 year periods, stocks had a real return of at least 4.45%. In 80% of 30 year periods, real returns were at least 5%.

Bonds' historic returns are far less useful, IMHO, going forward because we're starting at such low yields. Over the course of the next decade, current yields are about the best estimate we have for intermediate-term bonds' return.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

fyre4ce
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Re: How to calculate exactly how much money you'll have by retirement?

Post by fyre4ce » Tue May 14, 2019 3:46 pm

LiterallyIronic wrote:
Tue May 14, 2019 2:49 pm
MathWizard wrote:
Tue May 14, 2019 2:27 pm
I use 4% real, and do all calculations in real (inflation adjusted) dollars.
I used to use 6%, but scaled back since 2000.

Exactly is not possible, but I believe 4% real is conservative enough. Being a little low on the rate of return
is safer than too high.
I always confuse "real" and "nominal." I use 4% in my projections, too, but I don't know if it's real or nominal. I assume that if I have $100 this year, then I'll have $104 next year, $108.16 the next year, and so on. Just straight up 4% return every year.
4% nominal is in between the yields on an intermediate-term and long-term corporate bonds (VICSX and VLTCX), so that would be slightly more aggressive than a 100% bond portfolio. 4% real would historically be about a 25% bond/75% stock portfolio, but if you plug in today's bond yields it's more like 50/50.

LiterallyIronic
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Re: How to calculate exactly how much money you'll have by retirement?

Post by LiterallyIronic » Tue May 14, 2019 3:58 pm

willthrill81 wrote:
Tue May 14, 2019 3:11 pm
Historically, 4% real is a conservative, but not overly so, estimate of long-term returns for stocks. In 90% of the historic 30 year periods, stocks had a real return of at least 4.45%. In 80% of 30 year periods, real returns were at least 5%.

Bonds' historic returns are far less useful, IMHO, going forward because we're starting at such low yields. Over the course of the next decade, current yields are about the best estimate we have for intermediate-term bonds' return.
fyre4ce wrote:
Tue May 14, 2019 3:46 pm
4% nominal is in between the yields on an intermediate-term and long-term corporate bonds (VICSX and VLTCX), so that would be slightly more aggressive than a 100% bond portfolio. 4% real would historically be about a 25% bond/75% stock portfolio, but if you plug in today's bond yields it's more like 50/50.
I thought one included inflation and one didn't, but neither of you mentioned inflation at all. If I say 4% I expect the return to take me from $100 to $104, disregarding inflation making $104 next year worth less than $104 this year, would that be a 4% real return or 4% nominal return?

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Phineas J. Whoopee
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Re: How to calculate exactly how much money you'll have by retirement?

Post by Phineas J. Whoopee » Tue May 14, 2019 4:15 pm

The late John Bogle famously wrote Successful investing involves doing just a few things right and avoiding serious mistakes. It's the first of the twelve pillars in the speech.

I believe pretending one can know the future with precision is a serious mistake.

PJW
Last edited by Phineas J. Whoopee on Tue May 14, 2019 4:29 pm, edited 1 time in total.

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willthrill81
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Re: How to calculate exactly how much money you'll have by retirement?

Post by willthrill81 » Tue May 14, 2019 4:19 pm

LiterallyIronic wrote:
Tue May 14, 2019 3:58 pm
willthrill81 wrote:
Tue May 14, 2019 3:11 pm
Historically, 4% real is a conservative, but not overly so, estimate of long-term returns for stocks. In 90% of the historic 30 year periods, stocks had a real return of at least 4.45%. In 80% of 30 year periods, real returns were at least 5%.

Bonds' historic returns are far less useful, IMHO, going forward because we're starting at such low yields. Over the course of the next decade, current yields are about the best estimate we have for intermediate-term bonds' return.
fyre4ce wrote:
Tue May 14, 2019 3:46 pm
4% nominal is in between the yields on an intermediate-term and long-term corporate bonds (VICSX and VLTCX), so that would be slightly more aggressive than a 100% bond portfolio. 4% real would historically be about a 25% bond/75% stock portfolio, but if you plug in today's bond yields it's more like 50/50.
I thought one included inflation and one didn't, but neither of you mentioned inflation at all. If I say 4% I expect the return to take me from $100 to $104, disregarding inflation making $104 next year worth less than $104 this year, would that be a 4% real return or 4% nominal return?
A real return means an inflation-adjusted one (i.e. nominal - inflation). If you disregard inflation, you are talking about nominal returns.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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ruralavalon
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Re: How to calculate exactly how much money you'll have by retirement?

Post by ruralavalon » Tue May 14, 2019 4:20 pm

shanebagel wrote:
Tue May 14, 2019 2:08 pm
I invest in VTTSX which is a 2060 target retirement date fund through vanguard. What should I use as a percentage in my calculations? I have been using %7, as the market returns about %10 which adjusted for inflation is 3%? Thanks!
shanebagel wrote:
Tue May 14, 2019 2:19 pm
Thanks! Haha I totally feel that. Do you think that this is a good assumption I've made as far as actually calculating how much money is needed? How much do you contribute yearly if you don't mind me asking.
I don't know what returns the markets will give.

Here are calculators you can use to assess the range of results from different levels of contributions:
1) www.firecalc.com ; and
2) www.i-orp.com.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

NotWhoYouThink
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Re: How to calculate exactly how much money you'll have by retirement?

Post by NotWhoYouThink » Tue May 14, 2019 4:22 pm

You can't. You can't know exactly what you will have, or exactly what you will need. The future, including tomorrow, is uncertain.

Save 15-20% of gross income, invest in a low cost diversified portfolio, and do projections like those above every 5-10 years.

fyre4ce
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Re: How to calculate exactly how much money you'll have by retirement?

Post by fyre4ce » Tue May 14, 2019 4:30 pm

willthrill81 wrote:
Tue May 14, 2019 4:19 pm

A real return means an inflation-adjusted one (i.e. nominal - inflation). If you disregard inflation, you are talking about nominal returns.
Yes, I should have made this clear, my mistake.

I don't fully understand the relationship between interest rates and inflation. Intuitively, it seems to me like the two should be positively correlated, ie. when one rises, so does the other. It makes sense that borrowers would need to offer positive real interest rates in order to attract lenders. Some data seem to support this idea: https://www.crestmontresearch.com/docs/ ... onship.pdf Then again, I've read that modern monetary theory predicts that higher interest rates mean lower inflation. so I'm perplexed.

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willthrill81
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Re: How to calculate exactly how much money you'll have by retirement?

Post by willthrill81 » Tue May 14, 2019 4:32 pm

fyre4ce wrote:
Tue May 14, 2019 4:30 pm
willthrill81 wrote:
Tue May 14, 2019 4:19 pm

A real return means an inflation-adjusted one (i.e. nominal - inflation). If you disregard inflation, you are talking about nominal returns.
Yes, I should have made this clear, my mistake.

I don't fully understand the relationship between interest rates and inflation. Intuitively, it seems to me like the two should be positively correlated, ie. when one rises, so does the other. It makes sense that borrowers would need to offer positive real interest rates in order to attract lenders. Some data seem to support this idea: https://www.crestmontresearch.com/docs/ ... onship.pdf Then again, I've read that modern monetary theory predicts that higher interest rates mean lower inflation. so I'm perplexed.
Nobody, including the Federal Reserve, does. That being said, it seems that the two are negatively correlated. The Fed attempts to very crudely control inflation with the Fed funds rate, increasing the latter when they want to decrease inflation, and vice versa.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: How to calculate exactly how much money you'll have by retirement?

Post by dknightd » Tue May 14, 2019 4:38 pm

NotWhoYouThink wrote:
Tue May 14, 2019 4:22 pm
You can't. You can't know exactly what you will have, or exactly what you will need. The future, including tomorrow, is uncertain.

Save 15-20% of gross income, invest in a low cost diversified portfolio, and do projections like those above every 5-10 years.
I agree. You can't project what you might end up with in 2060. You can try to get a range. Pick some numbers. With that long a time horizon it is amazing the difference 3%, 6%, or 9% growth will produce.
You also can not predict how long you will be able to keep saving. 15% of gross might work but might be marginal. 20% or more should work most of the time.

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GerryL
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Re: How to calculate exactly how much money you'll have by retirement?

Post by GerryL » Tue May 14, 2019 5:23 pm

There is no "exactly" in investing, but here is what I did to estimate how much I might expect to have when I reached retirement -- and whether I needed to adjust my savings rate.

I created a simple spread sheet to roughly calculate how much I would have each year until planned retirement in several scenarios. Column A was years (current until planned retirement year) and the next columns each calculated a different scenario ($X annual savings + 6% growth; $Y annual savings + 7% growth, etc.) as many scenarios as you want to track. At the beginning of each year I recreated the worksheet on a new tab for the current year, deleted the line for last year and updated the line for the current year to reflect the actual amount in my retirement/savings.

Ideally, the actual figure each year will exceed the what was predicted the previous year for the scenario you are actually following (i.e. $ being saved). Looking back I can see that 2009-2010 were the only years that I fell short, but soon made up for lost ground. When things at work got dicey, I added scenarios for no further contributions to savings. The results of those calculations calmed me down when I thought about the possibility of losing my job.

By consistently low-balling my savings and growth rate in the calculations, I had a pretty good idea of "at least" (not exactly) how much I would have saved for retirement.

dknightd
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Re: How to calculate exactly how much money you'll have by retirement?

Post by dknightd » Tue May 14, 2019 6:02 pm

Once you figure out how much you will have. The perhaps more difficult question is how much do think you will need/want.

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Nate79
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Re: How to calculate exactly how much money you'll have by retirement?

Post by Nate79 » Tue May 14, 2019 9:38 pm

Come back in 45 years and bump your thread and then we will know.

aristotelian
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Re: How to calculate exactly how much money you'll have by retirement?

Post by aristotelian » Tue May 14, 2019 10:08 pm

Try a tool like Monte Carlo simulation on Portfoliovisualizer.com. It gives you a range of outcomes, not an exact number, but that is the best you are going to do (unless you invest in 100% CD's).

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Re: How to calculate exactly how much money you'll have by retirement?

Post by 22twain » Tue May 14, 2019 10:22 pm

ruralavalon wrote:
Tue May 14, 2019 4:20 pm
Here are calculators you can use to assess the range of results from different levels of contributions:
1) www.firecalc.com ; and
2) www.i-orp.com.
On FireCalc's home page ("Start Here" tab) I entered 0 for the initial portfolio, and 30 for the number of years.

On the "Not Retired?" tab, I entered 2049 for the retirement year, and 12000 (1000 per month) for contributions. FireCalc assumes no withdrawals before then, so the spending rate on the "Start Here" tab is irrelevant.

On the results tab, I get final balances (in 2049) ranging from about 375,000 to 1,854,000 in today's dollars. Most of the results seem to be clustered between about 750,000 and 1,300,000.

The OP didn't state his actual contributions, but he can scale the results accordingly, or go to FireCalc and enter them himself.

This assumes a portfolio of 75% equities. This can be adjusted on the "Your Portfolio" tab.

This is all based on past data for returns and inflation. Nobody knows what the future will bring. Nevertheless, I think it's reasonable to assume approximately as much variation in future results.
My investing princiPLEs do not include absolutely preserving princiPAL.

cherijoh
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Re: How to calculate exactly how much money you'll have by retirement?

Post by cherijoh » Wed May 15, 2019 7:15 am

LiterallyIronic wrote:
Tue May 14, 2019 2:49 pm
MathWizard wrote:
Tue May 14, 2019 2:27 pm
I use 4% real, and do all calculations in real (inflation adjusted) dollars.
I used to use 6%, but scaled back since 2000.

Exactly is not possible, but I believe 4% real is conservative enough. Being a little low on the rate of return
is safer than too high.
I always confuse "real" and "nominal." I use 4% in my projections, too, but I don't know if it's real or nominal. I assume that if I have $100 this year, then I'll have $104 next year, $108.16 the next year, and so on. Just straight up 4% return every year.
It could be either one. The difference is in purchasing power. Nominal dollars are the "face" value of the money, while real gives you the same purchasing power in the future as at some reference point (usually today). So saying you'll have $1.5 M nominal dollars at retirement is a lot easier to do (and less enlightening for retirement planning) than shooting for $1.5M in today's dollars (i.e., real).

If you are estimating your retirement spending needs based on your current expenses with adjustments (e.g., paid of mortgage, increased travel expenses, etc.) then you are implicitly using real for planning purposes. The problem comes in when people say they are using a 7% portfolio return for a 60/40 AA (which is reasonable IMO for a nominal return but high for a real return) but then don't adjust their expenses for inflation. So they are either overestimating how well their portfolio will do or underestimating their future needs.

MnD
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Re: How to calculate exactly how much money you'll have by retirement?

Post by MnD » Wed May 15, 2019 7:36 am

I set up a Lotus 123 spreadsheet in 1986 (later converted to Excel) for a planned for 2018 retirement.
It worked out almost exactly as estimated, but the assumptions were quite wrong. My estimated annual return was too optimistic (go-go mid-late 1980's thinking) but we ended up with higher work income growth and contributing more than I had initially estimated, so the two balanced out. We started saving at 10% household income plus whatever employer matches, and gradually increased to the IRS limit on 401-K plus some taxable account savings.

dbr
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Re: How to calculate exactly how much money you'll have by retirement?

Post by dbr » Wed May 15, 2019 8:15 am

As others have said, you can't. The problem is not less complicated than it is and a statistical model is required to answer the question at minimum.

Also, as others have posted, things change, often in ways you wouldn't anticipate.

Retirement is a journey.

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Re: How to calculate exactly how much money you'll have by retirement?

Post by basspond » Wed May 15, 2019 8:28 am

I used 7-9%. I use Excel spreadsheet and run different interest rates, savings, expenses, etc and got a range of numbers. As I aged the rate of return got closer to 5%. It was a good tool to track our progress and motivated us to save even more. In the end the projections were within 10%. We even went to a financial planner over 20 years ago and their projection was within 15%.

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Re: How to calculate exactly how much money you'll have by retirement?

Post by carolinaman » Wed May 15, 2019 9:18 am

Just to pick on your question, it is not possible to calculate exactly how much to have in retirement. Retirement calculations are always a best guess. The farther away retirement, the more it is a guess. I use real returns (return less inflation) for projections which simplifies it a bit. Another approach is to vary your calculations, using a expected calculation and a conservative calculation which hedges your bet so to speak. There are other calculations that are equally important. For example, your retirement budget is a major factor in how long your retirement savings will last.

Best wishes in figuring all of this out.

longinvest
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Re: How to calculate exactly how much money you'll have by retirement?

Post by longinvest » Wed May 15, 2019 9:42 am

longinvest wrote:
Tue May 14, 2019 2:34 pm
shanebagel wrote:
Tue May 14, 2019 2:08 pm
I invest in VTTSX which is a 2060 target retirement date fund through vanguard. What should I use as a percentage in my calculations? I have been using %7, as the market returns about %10 which adjusted for inflation is 3%? Thanks!
I don't know exactly how much money I'll have by retirement. But, I aim to balance accumulation-time spending with retirement-time spending. So, I save money and adjust over time to how big my portfolio grows using the yearly calculations outlined in this post. If you'd like so, I would be willing to help you apply similar calculations to your own situation and portfolio choice.
Shanebagel, just in case you missed it, I repeat my offer to help you apply the calculations to your own sit.
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

longinvest
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Re: How to calculate exactly how much money you'll have by retirement?

Post by longinvest » Wed May 15, 2019 9:42 am

longinvest wrote:
Tue May 14, 2019 2:34 pm
shanebagel wrote:
Tue May 14, 2019 2:08 pm
I invest in VTTSX which is a 2060 target retirement date fund through vanguard. What should I use as a percentage in my calculations? I have been using %7, as the market returns about %10 which adjusted for inflation is 3%? Thanks!
I don't know exactly how much money I'll have by retirement. But, I aim to balance accumulation-time spending with retirement-time spending. So, I save money and adjust over time to how big my portfolio grows using the yearly calculations outlined in this post. If you'd like so, I would be willing to help you apply similar calculations to your own situation and portfolio choice.
Shanebagel, just in case you missed it, I repeat my offer to help you apply the calculations to your own situation.
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

Topic Author
shanebagel
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Re: How to calculate exactly how much money you'll have by retirement?

Post by shanebagel » Wed May 15, 2019 1:11 pm

Yeah I would like to see how thats done. Thanks!

LiterallyIronic
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Re: How to calculate exactly how much money you'll have by retirement?

Post by LiterallyIronic » Wed May 15, 2019 1:49 pm

cherijoh wrote:
Wed May 15, 2019 7:15 am
LiterallyIronic wrote:
Tue May 14, 2019 2:49 pm
MathWizard wrote:
Tue May 14, 2019 2:27 pm
I use 4% real, and do all calculations in real (inflation adjusted) dollars.
I used to use 6%, but scaled back since 2000.

Exactly is not possible, but I believe 4% real is conservative enough. Being a little low on the rate of return
is safer than too high.
I always confuse "real" and "nominal." I use 4% in my projections, too, but I don't know if it's real or nominal. I assume that if I have $100 this year, then I'll have $104 next year, $108.16 the next year, and so on. Just straight up 4% return every year.
It could be either one. The difference is in purchasing power. Nominal dollars are the "face" value of the money, while real gives you the same purchasing power in the future as at some reference point (usually today). So saying you'll have $1.5 M nominal dollars at retirement is a lot easier to do (and less enlightening for retirement planning) than shooting for $1.5M in today's dollars (i.e., real).

If you are estimating your retirement spending needs based on your current expenses with adjustments (e.g., paid of mortgage, increased travel expenses, etc.) then you are implicitly using real for planning purposes. The problem comes in when people say they are using a 7% portfolio return for a 60/40 AA (which is reasonable IMO for a nominal return but high for a real return) but then don't adjust their expenses for inflation. So they are either overestimating how well their portfolio will do or underestimating their future needs.
Hmm, tricky. I guess I just use nominal dollars and assume a return of 4% nominal annually on my 90/10 AA, because that should get me from my current $80,000 to $600,000 (assuming 4% growth and $24,000 annual contributions) in the next 15 years, so I can retire then with what, I guess, would be $600,000 nominal dollars. Which, based on 4% SWR, should allow me to pull out $2,000 nominal dollars every month. So I think everything is consistent.

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Re: How to calculate exactly how much money you'll have by retirement?

Post by Ben Mathew » Wed May 15, 2019 2:17 pm

I disagree with the claim that you don't need a return estimate. You cannot engage in any sort of financial planning without return estimates. Sure, we can't predict the future with great accuracy, but that shouldn't prevent us from doing the best we can. I think it's better to work out what will happen under a few different return scenarios, and make sure you'll be okay even if returns come in a few percentage points below your expectations.

For my real return assumptions, I would start with:

- Stocks: earnings yield (earnings/price, i.e. the reciprocal of the PE ratio) - so about 4.9% for VTSAX and 6.9% for VTIAX.
- Safe inflation adjusted bonds (TIPS): the stated real yield
- Safe nominal bonds: stated nominal yield - expected inflation (about 2%).

A conservative estimate would use lower returns than these expected returns.

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Re: How to calculate exactly how much money you'll have by retirement?

Post by Ben Mathew » Wed May 15, 2019 2:22 pm

cherijoh wrote:
Wed May 15, 2019 7:15 am
It could be either one. The difference is in purchasing power. Nominal dollars are the "face" value of the money, while real gives you the same purchasing power in the future as at some reference point (usually today). So saying you'll have $1.5 M nominal dollars at retirement is a lot easier to do (and less enlightening for retirement planning) than shooting for $1.5M in today's dollars (i.e., real).

If you are estimating your retirement spending needs based on your current expenses with adjustments (e.g., paid of mortgage, increased travel expenses, etc.) then you are implicitly using real for planning purposes. The problem comes in when people say they are using a 7% portfolio return for a 60/40 AA (which is reasonable IMO for a nominal return but high for a real return) but then don't adjust their expenses for inflation. So they are either overestimating how well their portfolio will do or underestimating their future needs.
Yes. And I think it's easiest to plan with real dollars (today's dollars) and real returns. It's very hard to wrap our heads around what nominal dollars mean in 30 years.

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Re: How to calculate exactly how much money you'll have by retirement?

Post by Ben Mathew » Wed May 15, 2019 2:31 pm

LiterallyIronic wrote:
Wed May 15, 2019 1:49 pm
cherijoh wrote:
Wed May 15, 2019 7:15 am
LiterallyIronic wrote:
Tue May 14, 2019 2:49 pm
MathWizard wrote:
Tue May 14, 2019 2:27 pm
I use 4% real, and do all calculations in real (inflation adjusted) dollars.
I used to use 6%, but scaled back since 2000.

Exactly is not possible, but I believe 4% real is conservative enough. Being a little low on the rate of return
is safer than too high.
I always confuse "real" and "nominal." I use 4% in my projections, too, but I don't know if it's real or nominal. I assume that if I have $100 this year, then I'll have $104 next year, $108.16 the next year, and so on. Just straight up 4% return every year.
It could be either one. The difference is in purchasing power. Nominal dollars are the "face" value of the money, while real gives you the same purchasing power in the future as at some reference point (usually today). So saying you'll have $1.5 M nominal dollars at retirement is a lot easier to do (and less enlightening for retirement planning) than shooting for $1.5M in today's dollars (i.e., real).

If you are estimating your retirement spending needs based on your current expenses with adjustments (e.g., paid of mortgage, increased travel expenses, etc.) then you are implicitly using real for planning purposes. The problem comes in when people say they are using a 7% portfolio return for a 60/40 AA (which is reasonable IMO for a nominal return but high for a real return) but then don't adjust their expenses for inflation. So they are either overestimating how well their portfolio will do or underestimating their future needs.
Hmm, tricky. I guess I just use nominal dollars and assume a return of 4% nominal annually on my 90/10 AA, because that should get me from my current $80,000 to $600,000 (assuming 4% growth and $24,000 annual contributions) in the next 15 years, so I can retire then with what, I guess, would be $600,000 nominal dollars. Which, based on 4% SWR, should allow me to pull out $2,000 nominal dollars every month. So I think everything is consistent.
It may be consistent. But the problem is that you won't know if $2,000 nominal dollars per month will be enough unless you translate it back to today's dollars. If inflation is 2% per year, $2,000/month 30 years from now will only be equivalent to $1,104/month today.

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Re: How to calculate exactly how much money you'll have by retirement?

Post by longinvest » Wed May 15, 2019 8:30 pm

longinvest wrote:
Wed May 15, 2019 9:42 am
longinvest wrote:
Tue May 14, 2019 2:34 pm
shanebagel wrote:
Tue May 14, 2019 2:08 pm
I invest in VTTSX which is a 2060 target retirement date fund through vanguard. What should I use as a percentage in my calculations? I have been using %7, as the market returns about %10 which adjusted for inflation is 3%? Thanks!
I don't know exactly how much money I'll have by retirement. But, I aim to balance accumulation-time spending with retirement-time spending. So, I save money and adjust over time to how big my portfolio grows using the yearly calculations outlined in this post. If you'd like so, I would be willing to help you apply similar calculations to your own situation and portfolio choice.
Shanebagel, just in case you missed it, I repeat my offer to help you apply the calculations to your own situation.
shanebagel wrote:
Wed May 15, 2019 1:11 pm
Yeah I would like to see how thats done. Thanks!
OK. Before starting with calculations, let me explain the general idea and also ask you for some additional information that will be necessary for calculations.

We'll divide the person's lifetime in two parts: accumulation and retirement. During the accumulation phase, the person earns a salary and saves part of this salary into a portfolio (within a tax-deferred account like an IRA or a 401K). During the retirement phase, the person takes withdrawals from the portfolio and also receives a Social Security pension. We'll calculate the required savings amount such that accumulation (salary - savings) is equal to retirement (withdrawals + pension).

To cope with the fact that future returns, future inflation, future wages, and future financial setbacks (or windfalls) are unknown, we'll keep calculations simple and assume that the person will remain flexible and adapt, every year, savings (during accumulation) and withdrawals (during retirement) to the evolving reality (effective portfolio size, etc.).

Note how we won't be targeting a specific portfolio size. Instead, we'll try to equalize "pre-tax income", after subtracting tax-deferred savings, during accumulation and retirement.

We'll analyze two scenarios:
  • early retirement at age 55 with Social Security delayed to age 70, and
  • normal retirement at age 65 with Social Security delayed to age 70.
In order to make calculations, we need the following information:
  • [not sure] current age (probably 25, based on the 2060 target retirement date fund choice)
  • [missing] current annual salary (approximate)
  • [missing] current portfolio size (approximate)
  • current and future asset allocation (we'll use the 2060 target retirement date fund)
  • [missing, but we could try to estimate them] Social Security pension estimates if the current salary is earned until retirement at ages 55 and 65.
So, could you confirm that age is near 25 and also provide approximate annual salary and portfolio size?
Last edited by longinvest on Thu May 16, 2019 9:55 pm, edited 2 times in total.
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Re: How to calculate exactly how much money you'll have by retirement?

Post by shanebagel » Thu May 16, 2019 9:06 am

Current age: 21
Current annual salary: 50,000, currently 16,000, but I am graduating from college in a year so I expect to make more money
Current Portfolio size: 30,000
2060 target retirement date fund, 90% stocks 10% bonds
Social security pensions unsure

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Re: How to calculate exactly how much money you'll have by retirement?

Post by shanebagel » Thu May 16, 2019 9:18 am

I don't know if this helps, but I also plan to contribute %50 of my income to investing. I want to put half into mutual funds, and half into real estate.

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Re: How to calculate exactly how much money you'll have by retirement?

Post by longinvest » Fri May 17, 2019 12:49 am

shanebagel wrote:
Thu May 16, 2019 9:06 am
Current age: 21
Current annual salary: 50,000, currently 16,000, but I am graduating from college in a year so I expect to make more money
Current Portfolio size: 30,000
2060 target retirement date fund, 90% stocks 10% bonds
Social security pensions unsure
shanebagel wrote:
Thu May 16, 2019 9:18 am
I don't know if this helps, but I also plan to contribute %50 of my income to investing. I want to put half into mutual funds, and half into real estate.
Thanks for the information, Shanebagel. I think that we have enough to calculate a variable savings rate (VSR) for the first year of work.

For simplicity, all calculations will be expressed using 2019 dollars*. All investing will be done in tax-deferred accounts (IRA, 401K, etc.). I'll also assume that the first full-year of work will be at age 22 at a $50,000 annual salary.

* In other words, all amounts will be adjusted to inflation, so that $1 in 2062 will have the same buying power as $1 in 2019.

My objective will be to calculate a (variable) savings rate for retirement savings. Other savings, like accumulating a house down payment for example, will need to be done separately.

We need an estimate of the Social Security pension. Luckily, forum member Neurosphere has developed an easy-to-use Social Security Estimator spreadsheet. Assuming that the salary remains $50,000 (inflation-adjusted) until retirement and Social Security is delayed until age 70, I got estimates for two scenarios:
  • Early retirement at age 55: $2,129/month = $25,548/year
  • Retirement at age 65: $2,129/month = $25,548/year
Let's start with the early retirement scenario. We're starting with a $30,000 portfolio which is invested into a Target Retirement fund. Target Retirement funds start with a 90/10 stocks/bonds allocation and eventually glide down to a 30/70 stocks/bonds allocation late in life. The average allocation to stocks is: ((90% + 30%) / 2) = 60%. So, I'll make calculations as if the portfolio had a constant 60/40 stocks/bonds allocation.

Nobody knows how much stocks and bonds will return over the next 80 years. So, instead of trying to guess future returns, I'll use what I call a growth trend for both stocks and bonds. A growth trend isn't a future return prediction; it's just a wild-ass guess such that good returns are higher than this trend, and bad returns are lower than this trend. I'll use the historical long-term average returns of world stocks and bonds from 1900 to 2018 (a period of 119 years) which were 5.0% real** for stocks and 1.9% real for bonds according to the Summary Edition of the Credit Suisse Global Investment Returns Yearbook 2019 (PDF). For our 60/40 stocks/bonds portfolio, I get a ((60% X 5.0%) + (40% X 1.9%)) = 3.76% growth trend.

** Real means inflation-adjusted.

If returns were constant and equal to the growth trend (they're not!), the initial $30,000 investment at age 22 would grow to ($30,000 X (1.0376^33)) = $101,417 at age 55 (33 years later). Let's remember this number and continue with the next calculation.

We've estimated that, when delayed to age 70, the Social Security pension is $25,548 per year, more than half of the $50,000 annual salary. This pension is quite valuable as it is indexed to inflation, unaffected by market fluctuations, and it continues for life! But, there's a 15-year gap between retirement at age 55 and the start of Social Security payments. It would be nice if the $25,548 Social Security pension could be extended back to age 55. This is something that can be done quite easily. At age 55, we'll put ($25,548 X 15) = $383,220 into a high-interest savings account with an interest rate equal or greater than inflation, and then withdraw $2,129/month (adjusted to inflation, of course) from the account***. The savings account will get depleted just before the start of Social Security payments.

*** Actually, we'll withdraw 1/180 in the first month, 1/179 in the second month, ..., and 1/1 of the savings account balance in the 180th month. Note that 15 years is 180 months.

Of course, we'll need a big-enough portfolio so that we can move $383,220 from the Target Retirement fund into a savings account. Let's remember this and continue.

If we saved $1,000 per year and invested it into the Target Retirement fund from age 22 until retirement, we would get $63,313 at age 55. To calculate this, I needed to use a financial calculator:
  • n=33, i=3.76, PV=0, PMT=-1000, BGN=false => FV= 63312.79351 where:
    • n: number of periods
    • i: interest rate
    • PV: present value
    • PMT: periodic payment
    • BGN: true = payment at beginning of period, false = payment at end of period
    • FV: future value
We now have enough information to fix the Social Security gap. We need $383,220 at age 55 to do this. The initial $30,000 portfolio is currently projected to grow to $101,417 at age 55. We'll need an additional ($383,220 - $101,417) = $281,803. Each $1,000 of annual saving and investing gives us an additional $63,313. So, we need to save (($281,803 / $63,313) X $1,000) = $4,451 per year to fill the gap.

Let's look at it this way. If we start with a $30,000 portfolio and add $4,451 per year until retirement at age 55, and then move the investment into a savings account to fill the Social Security pension gap until age 70, we end up with:
  • During accumulation: ($50,000 - $4,451) = $45,449 per year to pay taxes and expenses.
  • During retirement: $25,548 per year to pay taxes and expenses.
OK, there's obviously a problem. For one thing, at age 70 we end up with no savings, waiting for the next Social Security payment to arrive. For another, annual pre-tax income (after savings) drops 44% from $45,449 during accumulation to $25,548 in retirement. That's a ($45,449 - $25,548) = $19,901 income drop!

We need to save more so that annual pre-tax income (after savings) remains equal during accumulation and retirement. We've already got almost all the pieces to fix this. We're missing one last piece. We need a portfolio withdrawal method. We'll use our wiki's variable percentage withdrawal (VPW) method.

The withdrawal percentage, at age 55 for a 60/40 stocks/bonds portfolio in the VPW Table, is 4.5%. We know that $1,000 in annual savings grows to $63,313 at age 55. VPW tells us that a $63,313 portfolio allows for a ($63,313 X 4.5%) = $2,849 annual (variable) withdrawal in retirement. Let's put this together. For each $3,849 in salary, if we saved $1,000, we would be left with $2,849 to pay taxes and expenses during accumulation, and we would be able to withdraw $2,849 from the portfolio to pay taxes and expenses in retirement.

OK. We now have the pieces to fix the $19,901 in income drop. We need to save $1,000 for each $3,849 so that income remains balanced between accumulation and retirement. In other words, we need to save an additional (($19,901 / $3,849) X $1,000) = $5,170 per year. This will allow for a (($5,170 / $1000) X $2,849) = $14,729 annual (variable) withdrawal in retirement.

Saving ($4,451 + $5,170) = $9,621 per year, ($9,621 / 12) = $802 per month, or ($9,621 / 26) = $370 per bi-weekly salary payment would result into similar pre-tax income (after savings) during accumulation and retirement:
  • During accumulation: ($50,000 - $9,621) = $40,379 per year to pay taxes and expenses.
  • During retirement: ($25,548 stable + $14,729 variable) = $40,277 (somewhat variable) per year to pay taxes and expenses.
Note that the small difference between $40,379 and $40,277 is due to rounding errors.

Let's recap. Given an initial $30,000 portfolio, a $50,000 salary from age 22 until early retirement at age 55, our calculations project that a ($9,621 / $50,000) = 20% variable savings rate (VSR) would allow for similar pre-tax income (after savings) during accumulation and retirement.

But, we're not done yet because we know that our calculations are inaccurate (stock and bond returns aren't constant nor predictable). We have to make sure our plan allows for enough flexibility to adapt to market fluctuations. We're not worried about higher returns; it'll be easy enough to adapt when returns will be higher than projected. We want to plan for the possibility of lower returns so that we're ready to cut expenses when they happen (but we actually won't cut expenses before they happen).

I'll explain how to do that in a future post. I'll also explain why it's important to calculate a new savings rate every year, based on the new (shorter) retirement horizon, the new (hopefully bigger) portfolio balance, and the new (hopefully bigger, too) salary. I'll finally apply our calculations to the scenario of a retirement at age 65.

For now, you can take away the conclusion that saving and investing 20% of your pre-tax income into tax-deferred retirement accounts, during your first year of work, is likely a good enough starting point toward an early retirement at age 55, given your age, your initial portfolio balance, the use of a Target Retirement fund, and a $50,000 salary.

Were my calculations (and explanations) clear enough, so far?
Last edited by longinvest on Fri May 17, 2019 9:48 am, edited 3 times in total.
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Re: How to calculate exactly how much money you'll have by retirement?

Post by shanebagel » Fri May 17, 2019 9:03 am

That explanation was very thorough thank you! Haha so essentially what you're saying is %20 invested from 22-65 would be sufficient? What would the dollar amount of that figure be?

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Re: How to calculate exactly how much money you'll have by retirement?

Post by longinvest » Fri May 17, 2019 9:20 am

shanebagel wrote:
Fri May 17, 2019 9:03 am
Haha so essentially what you're saying is %20 invested from 22-65 would be sufficient? What would the dollar amount of that figure be?
I'm saying that when targeting early retirement at age 55, a 21-years old worker (near his 22nd birthday) with a $50,000 starting salary and a $30,000 portfolio invested into a Target Retirement fund might want to save approximately $800 per month into tax-deferred accounts during his first year of work, and then reassess the situation at the end of his first year of work, taking into account his new situation at that point (new portfolio balance, new salary, new average future portfolio allocation) to determine a new savings rate for his second year of work. This process will be repeated every year until retirement at age 55 when a similar annual reassessment process will be applied for taking portfolio withdrawals.

As I wrote, I'll get into the details in a future post.
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Re: How to calculate exactly how much money you'll have by retirement?

Post by ruralavalon » Fri May 17, 2019 9:21 am

protagonist wrote:
Tue May 14, 2019 2:26 pm
Don't bother trying to calculate, Shane. We know about as much about the economic state of the world in 2060 as we do about life on other planets.

You are probably invested in a good fund. Just continue saving as much as you can while still enjoying life while you are young (you never know when it will end for you....it could happen before 2060).

When you decide you want to retire and decide you can afford it, you will. I can almost guarantee your thinking process will be different in 2060 than it is now. I'm 66. If somebody 41 years ago told me (accurately) what my life would be like today (including how much money I would have as well as almost everything else about my life), I would have nearly died laughing.
+ 1.

It is not possible to calculate anything exactly that far in advance.

Keep your savings rate as high as you can comfortably sustain, and don't forget to enjoy life before retirement.
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Re: How to calculate exactly how much money you'll have by retirement?

Post by longinvest » Sat May 18, 2019 10:52 am

Shanebagel, in my previous post, we've calculated that saving $370 every two weeks (that's $9,621 per year) on a $50,000 annual salary is a good enough initial starting point to target an early retirement at age 55 that preserves one's (flexible) standard of living.

Reminder: All amounts, in this post, are adjusted to inflation and expressed in 2019 dollars.

It's important to understand our retirement income plan at age 55 and later. Our plan is to combine stable retirement income with variable retirement income:
  • Stable lifelong income: $25,548 per year. From age 55 to age 69, this money is withdrawn from a high-interest savings account matching inflation that initially contains 15 X $25,548 and is gradually depleted. Starting at age 70 and for as long as the retiree lives, Social Security provides this $25,548 annually.
  • Variable income: initially $14,729 at age 55, but then fluctuating up and down with the portfolio. A new withdrawal amount is determined every year by multiplying the portfolio balance by the percentage looked up in the VPW table.
  • Total income: ($25,548 (stable) + $14,729 (variable)) = $40,277 (mildly variable).
Let's verify that this is a sensible plan by calculating the consequences if stocks lost 50% during the first year of retirement.

At age 56, the retiree would withdraw $25,548 from the savings account which is unaffected by market fluctuations. As for the portfolio, it's invested into the Target Retirement 2060 fund which will have approximately 60% (maybe 2% or 3% more) invested into stocks at that time. A 50% drop in stocks would cause a (50% X 60%) = 30% portfolio loss. As VPW withdrawals fluctuate with the portfolio, this would result into a 30% reduction in portfolio withdrawal at age 56. In other words, the portfolio withdrawal would be approximately ($14,729 - 30%) = $10,310 at age 56.

Total retirement income at age 56 would be ($25,548 (stable) + $10,310 (variable)) = $35,858. That's a mild (($35,858 / $40,277) - 1) = -11% reduction in income after a brutal -50% stock crash! I personally consider this good enough.

OK. Good. But, stocks are always risky; instead of crashing (dropping 50%) between age 55 and age 56, they could crash next week! Let's consider what would happen to our plan, if they did.

The current $30,000 portfolio invested into the Target Retirement 2060 has 90% of its money in stocks at this point. A 50% stock drop would cause a (50% X 90%) = 45% portfolio loss. The portfolio would shrink to ($30,000 - 45%) = $16,500.

Let's repeat the savings calculations of the previous post, but assume that the initial portfolio was $16,500 instead of $30,000:
  • The initial $16,500 grows to ($16,500 X (1.0376^33)) = $55,779 at age 55.
  • We need ($25,548 X 15) = $383,220 to fill the gap between 55 and the start of Social Security payments.
  • To entirely cover the Social Security gap, we need an additional ($383,220 - $55,779) = $327,441 at age 55, which we get by saving (($327,441 / $63,313) X $1,000) = $5,172 per year.
  • We're left with a (($50,000 - $5,172) - $25,548) = $19,280 income drop at age 55.
  • We can eliminate this income drop by saving an additional (($19,280 / $3,849) X $1,000) = $5,009 per year.
  • Summary: an immediate 50% stock drop, next week, would imply saving ($5,172 + $5,009) = $10,181 per year. That would represent a (($10,181 - $9,621) / 12) = $47 per month increase in savings, or if you prefer, a $47 per month reduction in money available for expenses.
Here's the point: The portfolio is currently $30,000. As a consequence, we'll set our savings to $370 every two weeks ($9,621 per year). We'll use the remaining salary to pay taxes and other expenses. But, we'll make sure to keep sufficient flexibility in our budget so that we can easily reduce monthly expenses by $50 (I've rounded up the $47) to adjust savings if the stock market decided to crash. It almost makes us wish for a stock market crash, so that we can buy more on the cheap. :wink:

Let me summarize what we've calculated, so far. A 21-year-old worker (near his 22nd birthday) with a $50,000 starting salary and a $30,000 portfolio invested into a Target Retirement fund should save $370 every two weeks to target early retirement at age 55. The worker must always keep enough flexibility in his budget to be able to reduce monthly expenses by up to $50 and increase savings next year*, if the portfolio fluctuates down.

* We only adjust savings once a year or when a significant change happens to our personal financial situation, like a big salary increase or a windfall.

In my next post, I'll look at what will happen at age 23, after one full year of work, assuming that the worker has followed the plan and added $370 to his portfolio every two weeks. I'll also briefly discuss other savings, like saving for a house downpayment.

Shanebagel, what do you think of this retirement savings plan, so far?
Last edited by longinvest on Sat May 18, 2019 5:06 pm, edited 13 times in total.
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Re: How to calculate exactly how much money you'll have by retirement?

Post by Wiggums » Sat May 18, 2019 11:34 am

Longinvest,

Very interesting perspective and response. I look forward to the next one.

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Re: How to calculate exactly how much money you'll have by retirement?

Post by ruralavalon » Sat May 18, 2019 11:57 am

Nice post longinvest. I like the emphasis on remaining flexible.

You say "would allow early retirement at age 55", might be better to say "could likely allow . . . ". In talking about the future I try to use words or phrases like "in my opinion", "could", "might", "probably" or "likely".
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Re: How to calculate exactly how much money you'll have by retirement?

Post by longinvest » Sat May 18, 2019 12:14 pm

ruralavalon wrote:
Sat May 18, 2019 11:57 am
You say "would allow early retirement at age 55", might be better to say "could likely allow . . . ". In talking about the future I try to use words or phrases like "in my opinion", "could", "might", "probably" or "likely".
Rulavalon, you're right. I've modified my text to say that it's "a good enough initial starting point to target an early retirement at age 55".
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Re: How to calculate exactly how much money you'll have by retirement?

Post by happymob » Sat May 18, 2019 12:26 pm

I use a 3% return as well. Based on history, it'll be higher. Based on current market valuations, who knows? A steady 3% annual real gain seems reasonably conservative to me over the next 25 years.

A lot of our income is pretty well set regardless of market performance. I know* what SS says each of us will be drawing at age 70 (assuming little or no raises). I know what my wife's pension at age 65 will be if she works another 11 years (the hand-wavy retirement plan right now). I know what my pension will be at age 65 (vested, already left the job). The RMDs are the real wildcard. But 3% real seems like a fair place to start. If we do better, it's a good tax problem to have.

*subject to the US continuing to pay 100% of benefits

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