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How much do you need for retirement?
By Felix Hung
How much do you need to retire? To figure out how much you need for retirement, you should work backwards. First thing you need to do is determine what kind of lifestyle you'd like in retirement and then LIVE IT FOR A MONTH. Don't believe you can live below your current means or you may be lying to yourself. You want to live it and know you can live like that for the rest of your life. Secondly, you will want to visit a webpage with a retirement calculator (like the ones linked on the bottom of this blog) and figure out how close or far you are from your goals. Too often I see the elderly at the supermarkets and grocery stores buying one dollar TV dinners and very cheap processed frozen and canned food items. This is probably because thinking and planning for retirement was not a priority and they were not honest with themselves. It's never too early to plan for retirement. With the Rule of 72, compound interest can greatly help your retirement goals. Let me give you some examples. Assuming you will retire at age 65, we'll compare two similar scenarios for ages 20, 30, 40, and 50 years old. The first will be an initial investment of $500 and yearly investments of $1200 until the age 65. Then we'll compare that to an initial investment of $500 and monthly investments of $100. --------------------------------------------------
YEARLY ADDITIONAL CONTRIBUTIONS OF $1200 Age 20: $500 initial investment and $1200 yearly additional contributions for 45 years at 6%. At age 65, you will have $277,492.05 at age 65 (principal portion equals (45 x $1200) + $500) Same scenario at 12%: $1,907,454.97 - this is plain 'ol compound interest in action. Double the interest yields more than six times the return.
---------- Age 30: $500 initial investment and $1200 yearly additional contributions for 35 years at 6%. At age 65, you will have $145,588.08 at age 65 (principal portion equals (35 x $1200) + $500)
Same scenario at 12%: $606,555.55
---------- Age 40: $500 initial investment and $1200 yearly additional contributions for 25 years at 6%. At age 65, you will have $71,933.59 at age 65 (principal portion equals (25 x $1200) + $500)
Same scenario at 12%: $187,700.75
---------- Age 50: $500 initial investment and $1200 yearly additional contributions for 15 years at 6%. At age 65, you will have $30,805.31 at age 65 (principal portion equals (15 x $1200) + $500)
Same scenario at 12%: $52,840.72
-------------------------------------------------- MONTHLY CONTRIBUTIONS OF $100 Age 20: $500 initial investment and $100 monthly additional contributions for 45 years at 6%. At age 65, you will have $282,989.24 at age 65 (principal portion equals (45 x $1200) + $500) Same scenario at 12%: $2,253,242.77- this is the rule of 72 in action. Double the interest yields almost eight times the return.
---------- Age 30: $500 initial investment and $100 monthly additional contributions for 35 years at 6%. At age 65, you will have $146,532.81 at age 65 (principal portion equals (35 x $1200) + $500)
Same scenario at 12%: $675,750.74
---------- Age 40: $500 initial investment and $100 monthly additional contributions for 25 years at 6%. At age 65, you will have $71531.88 at age 65 (principal portion equals (25 x $1200) + $500)
Same scenario at 12%: $197,778.9
---------- Age 50: $500 initial investment and $100 monthly additional contributions for 15 years at 6%. At age 65, you will have $30308.92 at age 65 (principal portion equals (15 x $1200) + $500)
Same scenario at 12%: $52955.92
---------- Look at the comparisons, you will notice that the higher the interest rate and the more often it is compounded, the higher the end result will be. With this information you would want to look at your monthly budget and lifestyle to determine how long your retirement savings will last you. Retire at 65 - live until 85 you will need 20 years worth of retirement dollars (divide your retirement calculator figure by 12 to get number of years your fund will last you and if that number is less than 1, that means you're retirement savings will last less than 1 year). Hopefully this will help motivate those who have not started or who have not been as disciplined in retirement savings. |
CNN's Retirement Planner and Calculator
| CNN Savings Calculator
| Wikipedia Rule of 72
| Compound Interest Calculator With Monthly Contributions
| Compound Interest Calculator With Annual Contributions
PLEASE VISIT THE CONTRIBUTOR'S WEBSITE
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Good intel Felix sound advice I hope you are following it! How do people who have already retired on to little income solve their problem? Next intel for you?
CONTRIBUTOR'S REPLY
I am, but not the "monthly" method. I make contributions to my investment accounts in lumped amounts when I sell homes. I like the idea for my next intel and I think I'll do it!
Living it for a month is such a good idea. When I was 20-something I decided on an amount of savings that I would need by a certain age and then looked for a career that would guarantee good retirement benefits. I thought that even if I reached my goals I would probably want to continue teaching after officially retiring, but guess what. I have been retired 4 years now and am having so much fun that I NEVER want to go back to work. We grow, we change!
CONTRIBUTOR'S REPLY
What was it that changed your thinking post retirement Janet?
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This intel was contributed by Felix Hung
Felix Hung
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May, 2012
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