What is the optimal amount for Retirement

Good Morning,

I ran across an article on CNBC yesterday that summarizes a report done by the Stanford Center of Longevity which highlights how people need to either double or triple their retirement savings a year. While this is a good article that sheds light on the lack of savings, it is hard to quantify based on the article using percentages, so I thought providing an example would be a better frame of reference.

Let's say I want to retire by 68 years old and plan on spending $60k a year in retirement for 30 years, based on a conservative investment return of 4% a year, on day 1 of retirement I need about $1.04 Million. Now based on my current age (38), and not having a dollar in my retirement, using the same investment return assumption (4%), I would need to save $18.5k for 30 years.

Based on this example the inputs that matter are:

  • Number of years (in retirement and working)
  • Amount needed yearly in retirement
  • Investment return assumption
  • Starting amount
This example can be adjusted in many ways, but the most popular adjustment involves the investment return assumption which some people will try to use 8% based on past returns. While this limits the amount needed to save yearly it is a faulty assumption based on the investment returns being dependent on GDP Growth which has been declining over the past 30 years. Also, most pension plans who have investment staffs and other investment resources cannot average this rate of return consistently. If I bump up the investment return assumption to 6% a year, the amount that would need to be saved each year would be about $10.5k.

Based on 2017 median income of 61k per a person, using the 6% investment return assumption retirement savings would be about 17% of income which is around the upper end of the percentages mentioned in the article. I hope this exercise provides a guideline of what to think about when considering retirement and how much you might need. I do not think this example will work for everyone but at a minimum, it should provide a starting point of what to consider.

FYI for those interested the study done by Stanford is pretty informative and I have included that link also.

#financialliteracy #cnbc #stanford #retirementsavings #retirement #income #stocks #bonds #stockmarket #stanfordcenterofliteracy #sightlinesproject #financialfloyd #phillyfinance


https://www.cnbc.com/2018/10/26/people-are-saving-about-half-of-what-they-should-be-for-retirement.html

http://longevity.stanford.edu/wp-content/uploads/2018/10/Sightlines-Financial-Security-Special-Report-2018.pdf



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