Calculating Nest Egg Size For Retirement

[skiehawk11]

The below method is a below general method to determine how much you need in retirement funds to retire comfortably.

Assumptions:
* 60,000 a year in yearly costs in 2013. That seems like a lot to me, but then I don't have a family. Insert your own yearly costs here.

First, convert your current yearly costs to the year you will retire. I assumed a 5.5% inflation rate. Current "official" numbers are around 2.4%, but I don't have faith in that number. I will want to retire at 62 which is 36 years from now.

Future yearly costs = 412k a year at year 2049. Inflation is a b!tch!!!

Assume average high 3 salary of 92,000 dollars in current dollars. Assume 2% (historical average is 3%) increase averaged over 36 years will be a average salary of 131,600 dollars. At 36 years, I get the 1.1% multiplier. So FERS pension is approximately 74,000 dollars.

Social security assumption: Current average Social security is around 24,000 a year. I'll assume a 2% increase in COLA. So, in 36 years your social security is approximately 48,900 dollars a year.

So total income in retirement would be: 74,000 + 48,900 = 122,900 dollars a year

Remaining costs is 412,000 - 122,900 = 289,1000 dollars a year.

The rule of thumb is to withdraw approximately 4.5% a year from your retirement accounts.

So, the nest egg you'll need with the assumptions above are:

289,100 / .045 = 6.4 million dollars

Is that number doable?

Let's assume total max contributions in the TSP and individual IRA. That number is approximately 23,000 a year (static). Assume 7% a year. Total balance would be 2.73 million dollars.

Obviously, there is a short fall.

No need to worry if there is a shortfall! Do the following to counteract the shortfall!

* Go into retirement with no debt!
* Reduce expenses leading up into retirement. Reducing expenses doesn't mean reducing quality of life.
* Work a little longer if needed.
* Your final average 3 salary is greater than predicted (Doable since my calculations assume static growth).
* Social security could be greater on an individual basis.
* Contribute to a taxable brokerage account.
* TSP federal contributions not taken into account.
* Greater rate of return will help tremendously. Assume a 9% return (very doable!) End result = 4.2 million dollars.

So, how much should you save on a monthly basis to get 6.4 million dollars in 36 years?

Approximately 3,500 dollars in today's dollars at 7%.
Approximately 2,000 dollars in today's dollars at 9%.

[aarvizo]

Do you know if TSP Calculators and participants in general assume TSP Retirement balance that produces a replacement of 33% of final salary (due to FERS pension and Social Security accounting for the difference), whereas 401K calculators presume no other retirement income so the nestegg account balance is significantly higher than TSP. I guess most investment and financial guru's want to be in complete control of their financial destiny and have ZERO reliance on Social Security or any Pension and if they get those its just a bonus to the retirement picture.

[meddian]

How did you get 74K from the 131K X 1.1 X 36 years? Is this correct? I don't believe Social Security will be here in 36 years. Trustees say 2 more years and its Bankrupt no money $0 is in the cookie jar. And they are trying to take away the 1.1% whereas CSRS gets 80% FERS get 1.1% now but in 36 years its more like 0.8%. They are even talking about taking aways the 4% matching. So I wouldn't count on a big pension nor Social Security. I mean it can change but I don't see them in 4 years doing nothing to keep it stable or raise the age limit they just sit there and let it drain out.

[draggen3]

Take it from a old fart 9 % is not do able through out .There are bear markets too cannot just stay in market and walk away as CNBC would have you do it . Hell look at last 13 years we are where we where 13 yrs ago!!
I believe there another around corner !! use caution!!

[Relevant]

Skie,

I'd recommend using the same inflation factor for all assumptions. It's illogical to use a factor of 5.5% for expenses and 2% for COLA's. The "official" factor sounds about right. The last time I calculated civ pay average COLA's it was 3% but that was several years ago before the beatings started.

http://www.RelevantInvestments.com

[crondanet5]

It varies. And in these times I feel safer with a more conservative estimate. Would anyone be hurt if they ended the year with more money than they expected to have?

[skiehawk11]

Relevant, thanks for the advice! Could you list other considerations as well? I am wanting to create a simple calculator for TSP members.

Meddian, I made a mistake. It should be 51.8k a year.

Draggen, for the most part, I'd agree that 9% is hard for many people to achieve. However, I've managed that average over the past 4 years. I'm optimistic that with the help of this site, others can achieve a higher rate of return with less volatility.

[Relevant]

Skie,

I created 2 retirement calculators that you might want to look at.

The first one best serves those within about 10 years of retirement. At this point in life you have a better idea of what your income needs will be and the value of your other benefits.

http://relevantinvestments.com/interactive-retirement-savings-calculator/

The second one best serves younger folks. It avoids the sticker shock of a seamingly unattainable goal by creating nearer term attainable milestones. The best part about this tool is it tells you where you should be now. If you're behind the power curve it tells you how far off you are.

http://relevantinvestments.com/milestone-calculator/

In 1988 when I explained to my co-workers that they would need to save nearly $1m in their TSP by 2020 in order to retire with nearly 100% of their pre-retirement income they thought I was nuts. Even when I showed them the math they couldn't comprehend saving $1m. I actually think it discouraged some from even trying. Back then I created individual spreadsheets by pay period projecting forward 30 years to show my co-workers how to measure their success at attaining their goals. I still have the one I created for myself in 1990 and even I am amazed at how accurate it has proven to be.

http://www.RelevantInvestments.com

[John316]

Whoa, slow down. You have 36 years to go. Nobody knows where we will be in 36 years. Look at the United States, for example, from 1914 to 1950. The entire economic landscape changed, we went through 2 world wars, a ravaging depression. I understand your planning and applaud you for your zeal, but to say how much and when and where is way beyond anybody's ability to forsee. "You do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes."
Plan, yes for sure. But stop and smell the roses and enjoy the day, you are not guaranteed another. Just my 1 cent worth (adjusted for inflation) :)

[Jock14]

The biggest and most blatent problem I see Skie is with the 412k of expenses vs 131.6k income in the future. I highly doubt costs will rise that much compared to salaries (as was pointed out by Relevant).

I've always though of retirement as an attempt to gain a specific % of whatever my current salary at the time is. If I want to retire and be able to pull out 30% of my salary (insert whatever % of salary you want) at that time for 30 years (insert length you want), I'm going to need a specific multiple of my salary in my TSP. Therefore, I try to measure my growth against my current salary and go from there.

If you know your planned rate of return 5% (or whatever you figure it will be), then you can solve for the necessary multiple of your salary at the time of retirement. Once you know that, you can use the scaling growth (annual return) 9% to calculate what % of your salary you should be at versus the age.

The basic idea is you don't have to account for the inflation because it would be constant between salary and expenses, so you just care about the ratio. The downside is you put a fixed growth rate on the market and a variable rate on salary, so if your salary/COLA jumps 10% one year, it will have a bigger short term effect than a 1% on that ratio. So in other words, it's a long-term based calculation rather than a short term (am I OK right now) one.

I haven't done all the math, so I'm not going to post a specific calculation here, but am I unclear or missing a necessary variable here?

[crondanet5]

I can think of a couple things to add.

1. Everyone needs a rainy day fund. I've heard as much as 2 years annual gross salary should be in this account.

2. Expect a major medical crisis within the first 2 years of retirement and have money set aside for copays.

3. Continue to invest your 401k money, perhaps in a different mix, after retiring to generate a bigger account balance.

4. Avoid the "Red Truck" syndrome, in which you buy a new red truck to enjoy in your retirement. Keep your money invested for future expenses, take the bus, walk or Prius it.

[greg7895]

I agree with Jock, isnt it easier and less variables to look at the 2 fixed factors that are based on income (Pension/SS). For me when I retire I figure I will need about 80% of my current income to have the same take home salary (Todays salary minus TSP contributions and FICA). My pension will cover 40% of my income and Social Security another 20% so TSP needs to make up the last 20% (Actually less for me as my wife will draw SS as well). Even assuming SS trust fund is exhausted in 2033 as currently projected they will still be able to pay out 75% of benefits after that,,,so still only looking at having to draw about 25% of last years salary out of TSP to maintain you current take home pay. Is my view too simplistic?

[talan150]

One thing is for sure. No body plans to fail. The real problem is failing to plan. Looking this far forward has many pitfalls. Life is Life afterall. Start with a plan and revisit often.

[Winner]

I used this one, http://www.opm.gov/retirement-services/calculators/