Help me Understand: Guide to Investing Book Chart

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windycityheat
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Help me Understand: Guide to Investing Book Chart

Post by windycityheat » Wed Oct 18, 2017 9:52 am

Reading through the Bogleheads guide to investing and trying to make sense of this graph on how much you should be saving.

I'm unclear what the (per $1000) means and the book says you will need to accumulate something like $21,122 for each $1000 of retirement income? What? Why so much? What am I missing?


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alex_686
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Re: Help me Understand: Guide to Investing Book Chart

Post by alex_686 » Wed Oct 18, 2017 10:08 am

For a income of $1,000 per year - that is from retirement to your death - you need $21,122 invested at the time of your retirement. The first number is a flow number - dollars per year. Your car's miles per gallon is a flow number. The second number is a stock number - a fixed amount at a certain time. How many gallons your gas tank can hold is a stock number.

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Re: Help me Understand: Guide to Investing Book Chart

Post by pkcrafter » Wed Oct 18, 2017 11:43 am

Basically, the safe withdrawal rate for 30 years in retirement starts with 4% of total assets. So, if you need $1000 per year, you would need to have saved assets of approx. $25,000. In you need $40,000/year income, you would need 1 million in today's dollars.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

windycityheat
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Re: Help me Understand: Guide to Investing Book Chart

Post by windycityheat » Wed Oct 18, 2017 1:26 pm

pkcrafter wrote:
Wed Oct 18, 2017 11:43 am
Basically, the safe withdrawal rate for 30 years in retirement starts with 4% of total assets. So, if you need $1000 per year, you would need to have saved assets of approx. $25,000. In you need $40,000/year income, you would need 1 million in today's dollars.

Paul
Thanks for the reply, just to clarify, so the "per $1,000" means if I just withdraw "$1,000" from my retirement fund per year. So the chart is factoring in inflation and annual return to show how much you would need at the time you start withdrawing?

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Re: Help me Understand: Guide to Investing Book Chart

Post by pkcrafter » Wed Oct 18, 2017 2:50 pm

windycityheat wrote:
Wed Oct 18, 2017 1:26 pm
pkcrafter wrote:
Wed Oct 18, 2017 11:43 am
Basically, the safe withdrawal rate for 30 years in retirement starts with 4% of total assets. So, if you need $1000 per year, you would need to have saved assets of approx. $25,000. In you need $40,000/year income, you would need 1 million in today's dollars.

Paul
Thanks for the reply, just to clarify, so the "per $1,000" means if I just withdraw "$1,000" from my retirement fund per year. So the chart is factoring in inflation and annual return to show how much you would need at the time you start withdrawing?
Correct. You will notice that as the returns go up the saving rate goes down. The tables also reflect inflation. You can find calculators on line that will do these calculations using your own input.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

windycityheat
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Re: Help me Understand: Guide to Investing Book Chart

Post by windycityheat » Wed Oct 18, 2017 5:59 pm

pkcrafter wrote:
Wed Oct 18, 2017 2:50 pm

Correct. You will notice that as the returns go up the saving rate goes down. The tables also reflect inflation. You can find calculators on line that will do these calculations using your own input.

Paul

Thanks Paul!

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Re: Help me Understand: Guide to Investing Book Chart

Post by #Cruncher » Wed Oct 18, 2017 8:56 pm

alex_686 wrote:
Wed Oct 18, 2017 10:08 am
For [an] income of $1,000 per year - that is from retirement to your death - you need $21,122 invested at the time of your retirement.
Not exactly. Chapter Six, How Much Do You Need to Save? is confusing. Actually table 6.2 says that to spend $1,159 per year you will need $21,122 at retirement. Here is the calculation using the Excel PV function:

Code: Select all

21,122 = PV((1 + 7%) / (1 + 3%) - 1, 30, -1159.27, 0, 1)
where   7%    is nominal investment growth
        3%    is inflation rate
        30    is years money needs to last in retirement
     1,159.27 is $1,000 indexed for 5 years inflation at 3%
The book's point could have been made much simpler if it had used constant dollars and real investment growth rates. Doing so would have allowed all six tables, 6.2 through 6.7, occupying two pages, to be replaced with something like the following:

Code: Select all

Real Growth   Portfolio Value Needed
Rate during   when Retire for Each
Retirement    $1,000 of Annual Spending
-----------   -------------------------
    2%               $22,844 
    3%               $20,188 
    4%               $17,984 
    5%               $16,141
Where, for example
22,844 = PV(2%, 30, -1000, 0, 1)

Another confusing part of Chapter Six is the last paragraph which says, in part:
In reality younger investors tend to be more aggressive by holding a higher percentage of their portfolio on equities. As a result they should expect a higher rate of return for taking on this additional risk. Then, as we get older and closer to retirement, we need to get more conservative. This means we'll be taking on less risk by lowering the percentage of equities in our portfolio and increasing the percentage of bonds, so we should expect lower returns.
The six tables 6.2 through 6.7, titled "Five Years to Retirement", "Ten Years to Retirement", ..., "Thirty Years to Retirement", each show results for four different nominal growth rates: 5%, 6%, 7%, and 8%. One could easily conclude from the titles of the tables and the quoted comment above that the growth rates are applied to the period before retirement. This is not so. The growth rates are applied only to the period after retirement.

The "Years to Retirement" is only used to inflation-index the $1,000. For example, table 6.2, "Five Years to Retirement", shows how much you need for each $1,159 of spending where 1,159 = 1000 * 1.03 ^ 5; and table 6.7, "Thirty Years to Retirement", shows how much you need for each $2,427 of spending (2,427 = 1000 * 1.03 ^ 30). The figures in table 6.7 are the same as those in table 6.2 except scaled up by the ratio of 2427 : 1159.

Rather than "How Much Do You Need to Save?", a more accurate chapter title would have been "How Much Do You Need to Have Saved?". The six tables only show how much savings must have been accumulated by the time one retires. Nothing in the chapter shows how much one needs to save each year to attain these amounts.

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