Author Topic: Retirement 401k calculators - my projections and will this be enough?  (Read 17086 times)

SpendyMcSpend

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I am using the Bloomberg.com retirement calculator here.  http://www.bloomberg.com/personal-finance/calculators/retirement/

My results:
Started with $80,000 at age 31.

"Your annual contribution of $17,000.00 will total $858,173.06 at 11% interest; by the age of 45."

"Your annual contribution of $17,000.00 will total $647,804.01 at 8% interest; by the age of 45."

Year   Total Annual Contribution   Total Fund Value
1   17,000.00   103,832.00
2   34,000.00   129,138.56
3   51,000.00   156,469.64
4   68,000.00   185,987.22
5   85,000.00   217,866.19
6   102,000.00   252,295.49
7   119,000.00   289,479.13
8   136,000.00   329,637.46
9   153,000.00   373,008.46
10   170,000.00   419,849.13
11   187,000.00   470,437.06
12   204,000.00   525,072.03
13   221,000.00   584,077.79
14   238,000.00   647,804.01


So my question is, first, is this realistic return-wise?  Second, is this enough to retire on if I spend about $30,000-40,000 per year (in today's dollars).  Thanks!  I feel like I can definitely save this much per year.

DoubleDown

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #1 on: October 16, 2012, 01:08:45 PM »
Hi, and congratulations on your already great start!

Personally, since I tend to be fairly moderate-to-conservative in my projections, I'd lean towards using the 8% target or even less. 11% pretty much mirrors the historical U.S. stock market index over all time. So, to achieve that rate of return, you'd have to likely be invested 100% in stocks every year over the next 14 years you have mapped out. I'd likely not have a 401k portfolio that aggressive as I was getting nearer to retirement.

More likely, you might want to be scaling down to become progressively "safer" over the next 14 years of investing, and having only, say, 20-40% in stocks as you get within a couple of years of retiring. The rest would be in less aggressive (i.e., risky) investments.

I think a more reasonable, long-term average rate of return might be closer to 7%.

Also, keep in mind that there are some pretty heavy restrictions about taking money out of a 401k before age 59.5. You can set up SEPP/72(t) withdrawals prior to age 59.5, but there's a limit on what you can access, and it may not quite match MMM's 4% "safe withdrawal rate." You might want to look at directing some of your investments to non-IRA type funds (just make sure to max out that company match on your 401k no matter what!).

For your second question, I'd suggest redoing the calculations at 7%, then get an idea of whether the projected amount will equal 25x your annual budget. If yes, then you are in business!

JohnGalt

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #2 on: October 16, 2012, 01:23:37 PM »
For your second question, I'd suggest redoing the calculations at 7%, then get an idea of whether the projected amount will equal 25x your annual budget. If yes, then you are in business!

This will miss inflation.  I do most of my projecting using a 4% real growth rate so that all the numbers I end up with are assuming 7% nominal growth and 3% inflation.  That gives me future dollars in terms of today's dollars.  You can, of course, substitute in different nominal / inflation rates as mine are somewhat conservative.  I'll usually run 3% and 5% real growth rates as well for "what if" scenarios.

DoubleDown

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #3 on: October 16, 2012, 01:43:08 PM »

This will miss inflation.  I do most of my projecting using a 4% real growth rate so that all the numbers I end up with are assuming 7% nominal growth and 3% inflation.  That gives me future dollars in terms of today's dollars.  You can, of course, substitute in different nominal / inflation rates as mine are somewhat conservative.  I'll usually run 3% and 5% real growth rates as well for "what if" scenarios.

Amen to that.

I also wouldn't likely count on 7% for inflation-adjusted  growth, at least not over the long haul. That's part of the reason I was suggesting dropping the predicted future values for the later years. But for a 31-year old, depending on her level of risk, it might be a reasonable choice at least for the first few years. I'm with you, I currently forecast about 4-5% growth for my own 401k. If things end up better than that, then I'm pleasantly surprised and can readjust the numbers for the remaining years accordingly, but I don't count on that.

Good points you make.

bo_knows

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #4 on: October 16, 2012, 01:55:49 PM »
No one has answered the question as to whether or not it is enough, so I will bite.

At $647,804.01, and age 45, a 4% withdrawal rate is only about 26k.  If you spend $35k in today's dollars, in 15 years that will be ~$54k. So, it seems like that current plan will give you enough cash flow to cover about half your expenses.

skyrefuge

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #5 on: October 16, 2012, 02:05:35 PM »
So my question is, first, is this realistic return-wise?  Second, is this enough to retire on if I spend about $30,000-40,000 per year (in today's dollars).

No, and no.  (well, maybe an 8% return is reasonable, but that's a nominal return, not a real, inflation-adjusted return).

You can use MMM's Shocking Simple Math as a quick sanity-check of your numbers.

Saving $17k/year and spending ~$35k/year works out to a 33% savings rate.  Starting from $0 in your stash, that takes about 26 years to reach financial independence at that savings rate.  You're not starting from 0, but that $80k isn't enough to bring that 26 years down to 14 years.  The main thing you're missing is inflation.  For MMM's math, he uses 5% as his inflation-adjusted return.

SpendyMcSpend

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #6 on: October 16, 2012, 02:15:33 PM »
Actually I should have been more accurate.  Right now I'm spending $23,000 per year but I think that I'd need to buy health insurance in retirement so it might go up to $30-40k.  So my current saving rate is 47% but I'd need to spend more in retirement than I am now, oddly enough.

Does anyone include employer paid health insurance in their gross income?

SpendyMcSpend

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #7 on: October 16, 2012, 02:25:00 PM »
According to this, if you start me at $0 retirement savings, I'd need to save $3000 a month to retire in 10 years.  My gross income each month is $4750 (before taxes).  HMMMM.  haha!

twinge

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #8 on: October 16, 2012, 02:27:01 PM »
Quote
Does anyone include employer paid health insurance in their gross income?

I get a quote for the kind of health insurance I plan to buy to estimate that cost and add it to my project retirement expenses.  But I don't feel right about it because a) the cost will be higher when I'm older and b)health insurance costs have been increasing at a greater rate than inflation.  But I also think it's very hard to predict any of it, so I just use that and predict it for my whole life rather than stopping it at Medicare age with the hope that my approach provides a buffer for the unexpected.  And it's not like I can't decide at a later date when I have more information that I need to work longer/save more to cover health care costs.

Also, I really prefer firecalc  http://www.firecalc.com/  to do my retirement planning as it doesn't focus on a fixed expected percentage expectation.

SpendyMcSpend

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #9 on: October 16, 2012, 02:33:28 PM »
is it possible to save $3000 a month on a $4750 gross monthly income? 

bo_knows

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #10 on: October 16, 2012, 02:35:36 PM »
is it possible to save $3000 a month on a $4750 gross monthly income?

Possible? Sure. Enjoyable? Largely depends on the person.

Also keep in mind, if you're grossing 4750, and saving 3000, you're only spending ~$1300 maybe? that means you're down to a yearly expense of $15,600... meaning you'd only need to save ~$400k.

We'd have to see a list of all your expenses, know what sort of area you live in (high COL? low COL?), and try to optimize.

To be fair, you could also consider the idea of part-time work at a certain point, rather than the full-time grind.  Save up a decent stash, cut back on work to just enough to cover expenses, and retire fully when your stash has compounded enough.
« Last Edit: October 16, 2012, 02:58:46 PM by bo_knows »

JohnGalt

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #11 on: October 16, 2012, 03:08:38 PM »

SpendyMcSpend

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #12 on: October 16, 2012, 03:22:06 PM »
Are there any calculators like this that take into account working part time making say $5000 per year?

SweetTPi

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #13 on: October 16, 2012, 04:27:16 PM »
This is the online calculator that I like to use, as it has a function where you can set it to calculate spending in such a way to make your savings last until whatever age you assume you'll die.  One thing I don't like is that it follows all the withdrawl rules on tax-advantaged accounts, so if you plan on doing a 401k-Roth workaround, then you have to finagle the calculator inputs a bit.  I usually reduce the amount I indicate as a 401k contrabution and put that money into the taxable pool instead.

http://www.smartmoney.com/retirement/planner/?link=SM_topnav_tools

As far as part-time work, I've just been seeing what the calculated budget amount is, and adding any part time money to the budget.


JohnGalt

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #14 on: October 16, 2012, 04:40:48 PM »
Are there any calculators like this that take into account working part time making say $5000 per year?

http://www.firecalc.com/ should let you do that.

inthebiz

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #15 on: October 18, 2012, 09:17:20 PM »
I don't think you should get caught up in this calculation. It's really not even a good ballpark estimation. What these online calculators figure is an average return rate over the time period. This is inaccurate because thats not how growth in the real world works. I point this out so that youre not fixated on a certain number of years and a certain performance target. Why shouldn't you be, you ask?

Let me offer another perspective if I may. Too many investors are focused on returns which inevitably leads to a more tactical strategy, aka, timing the market to either make up for losses or stay ahead of the game. Instead, look at your intended savings contributions and your FI number. How you get to that number is based on your contributions and the level of risk you take with that money. I don't have to tell you more risk is more return, but not always. So the point is, you will have ups and downs. Doing some math will show you the difference between $1000 invested with 8% over 5 years and $1000 invested with returns of 5%, 20%, 10%, 3%, and 2% (which averages 8%). Now factor the difference with hundreds of thousands of dollars over many years, you might see what I'm saying.

Not to confuse you more, I just don't want you to think 401k calcs really mean anything. Just save as much as you can at a risk level you're comfortable taking. When your account hits FI, tally another one for mustachianism.

You are on the right track with banking as much money as possible, but using average returns to get anyone to "x" number of years to FI is misleading.

JohnGalt

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #16 on: October 19, 2012, 08:34:27 AM »
I don't think you should get caught up in this calculation. It's really not even a good ballpark estimation. What these online calculators figure is an average return rate over the time period. This is inaccurate because thats not how growth in the real world works. I point this out so that youre not fixated on a certain number of years and a certain performance target. Why shouldn't you be, you ask?

Let me offer another perspective if I may. Too many investors are focused on returns which inevitably leads to a more tactical strategy, aka, timing the market to either make up for losses or stay ahead of the game. Instead, look at your intended savings contributions and your FI number. How you get to that number is based on your contributions and the level of risk you take with that money. I don't have to tell you more risk is more return, but not always. So the point is, you will have ups and downs. Doing some math will show you the difference between $1000 invested with 8% over 5 years and $1000 invested with returns of 5%, 20%, 10%, 3%, and 2% (which averages 8%). Now factor the difference with hundreds of thousands of dollars over many years, you might see what I'm saying.

Not to confuse you more, I just don't want you to think 401k calcs really mean anything. Just save as much as you can at a risk level you're comfortable taking. When your account hits FI, tally another one for mustachianism.

You are on the right track with banking as much money as possible, but using average returns to get anyone to "x" number of years to FI is misleading.

While I agree with just about everything you said here - I still think it's important to look at the calculations using at least a few different averages so that you know if you're at all in the ballpark on track for what you want to do.  If the numbers say that even with great returns, you'll be nowhere near hitting your goal in the timeframe you want - you'll know that you either need to do something different or completely change your expectations.  Likewise, maybe you're okay working for 15 more years but the calculations tell you that even with bad returns you'll hit your number in 5 years - allowing you to spend a little more or work a few less hours each week. 

For these types of projections - I think firecalc does the best job as it uses actual historical market returns.  Of course past results do not guarantee future results - but if 95% of the historical periods measured got you to your goal, I'd be feeling fairly confident that you'll get there too.  If only 50% of the historical periods got you there - I'd be concerned. 

Once you've used firecalc enough to feel comfortable using some just general averages, I think networthify is useful for showing you how income, spending, and returns all affect your long term savings goals and, if you have control over any of them, what you need to change to maximize both your current and long-term happiness. 

Bottom line - I don't think "banking as much money as possible" is the right answer for everyone. 

grantmeaname

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #17 on: October 19, 2012, 09:57:29 AM »
So the point is, you will have ups and downs. Doing some math will show you the difference between $1000 invested with 8% over 5 years and $1000 invested with returns of 5%, 20%, 10%, 3%, and 2% (which averages 8%).
That's because you're misunderstanding the math. You can't take the arithmetic mean of the numbers 5, 20, 10,3, and 2, then slap a percentage on the end and have it mean anything, because these numbers are being multiplied and not summed, and so you can't use a mean that sums them to get a meaningful measure of central tendency. You need to use a mean that multiplies them-- in this case, you would want the geometric mean, which is the nth root of the product of all n terms (and you have to express them correctly, so 8% is really 1.08%). Doing this, you would find the geometric means of your growth rates to be 7.805%. Let's do an example. What happens if you put one pile of money in a magical 7.805% bank account and the other gets the listed returns in the market?
Variable 7.8% (CAGR)
1000         1000
1050         1078.05
1260         1162.19
1386         1252.90
1427.58   1350.69
1456.13   1456.11
There's no difference!
(note: the table feature in this forum is garbage and not simple or intuitive to use.)
Quote
Not to confuse you more, I just don't want you to think 401k calcs really mean anything. Just save as much as you can at a risk level you're comfortable taking. When your account hits FI, tally another one for mustachianism.
Maybe I'm reading this wrong, but to me it looks like a superstitious distrust of projecting into the future. If that's your demeanor, that's fine. And yes, the stock market is inherently unpredictable. But that doesn't mean that it's impossible, infeasible, or even difficult to make meaningful predictions about the future that are rooted in reality.
Quote
You are on the right track with banking as much money as possible, but using average returns to get anyone to "x" number of years to FI is misleading.
Only if you don't use CAGR. Some in the press don't use CAGR, but that's because they're idiots, not because an arithmetic mean of numbers 100 times the size of the percentage change is a meaningful measure.

grantmeaname

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #18 on: October 19, 2012, 10:04:36 AM »
is it possible to save $3000 a month on a $4750 gross monthly income?
What you're really asking is if it's possible to live on $1750 a month minus taxes (which if you're making $55k and contributing $17k to a traditional 401k means you're only looking at a couple thousand dollars of tax a year, maybe in the ballpark of $200 a month-- assuming here that as a CPA you know all your deductions well). If somebody making $1750 a month minus taxes can live on that little (even in New York City), you can too; the amount beyond that that you're making is irrelevant, except to the extent that you have to consume to look professional. I don't think that that consumption should be very high if you're careful about how you spend it-- if you have to drive a BMW, drive a 90s BMW; if you have to go out to lunch, get a salad and a tea rather than a steak and a cocktail. It's not like you have to spend in proportion to what you're making-- that's one of the big points of Mustachianism!

That's not to say that it would be easy to spend that little, of course. You'd have to work at it to get your costs down to the point where you could afford to save like that. But it's certainly possible-- I made less than $1750/month last year and saved like two-thirds of it, and Bakari and ERE's Jacob put even me to shame (and they live in expensive cities rather than the dirt-cheap Midwest...)

inthebiz

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #19 on: October 19, 2012, 07:02:17 PM »
@grantmeaname

I don't really disagree with you and I understand the difference between arithmetic and geometric mean. I didn't want to go into explaining that as you did. However, what I'm trying to point out is retirement calcs use arithmetic mean and real investment returns use geometric.

I don't know why you used the table because it doesn't say anything to my point, neither return uses the arithmetic return of 8% that is being used by the retirement calculator.  Yes you solved for the geometric return of my annual returns, used it in your table then used an average return of 7.8%. We're talking about an average return of 8, not 7.8. The two calculations use reciprocials of eachother (geometric of my returns, 7.8 and average of 7.8) so of course there won't be a difference!

Average returns illustrate linear growth which isn't the case when you invest in securities. That's the point I'm trying to make.

Please take the time to read: http://www.investopedia.com/articles/06/compoundingdarkside.asp#axzz29iLJfhxo



inthebiz

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #20 on: October 19, 2012, 07:31:13 PM »
Quote
Not to confuse you more, I just don't want you to think 401k calcs really mean anything. Just save as much as you can at a risk level you're comfortable taking. When your account hits FI, tally another one for mustachianism.
Maybe I'm reading this wrong, but to me it looks like a superstitious distrust of projecting into the future. If that's your demeanor, that's fine. And yes, the stock market is inherently unpredictable. But that doesn't mean that it's impossible, infeasible, or even difficult to make meaningful predictions about the future that are rooted in reality..

Nothing superstitious about it. It's simply pretty silly to plug in a number of savings per year, a rate of return and number of years and think that's realistic. I don't mean to demean anybody at all by saying this. Some factors have already been mentioned here, but there are way more things to consider. I wonder what you mean by meaningful predictions that are rooted in reality? I didn't say it was impossible, if it were I wouldn't have a job, but it's certainly difficult, which is why I do.
« Last Edit: October 19, 2012, 07:33:10 PM by inthebiz »

kudy

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #21 on: October 20, 2012, 10:01:46 AM »
This thread of discussion speaks to something I've been considering about retirement planning - I can tell myself that I want to retire in 10 years, and use a flat 6-7% as a value for my money's growth until then, but I realize that the markets can swing wildly, and that in 10 years I may be under or over my desired retirement amount by a large margin.

So, it seems that part of every mustachian's plan should be flexibility: if I have to stay in the market and my job an extra few years, or if I have the opportunity to stop working after 8, I am happy with either scenario - if I can't be happy with either possibility, then I have unrealistic expectations of my current investments.

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #22 on: October 20, 2012, 10:13:39 AM »
This thread of discussion speaks to something I've been considering about retirement planning - I can tell myself that I want to retire in 10 years, and use a flat 6-7% as a value for my money's growth until then, but I realize that the markets can swing wildly, and that in 10 years I may be under or over my desired retirement amount by a large margin.

So, it seems that part of every mustachian's plan should be flexibility: if I have to stay in the market and my job an extra few years, or if I have the opportunity to stop working after 8, I am happy with either scenario - if I can't be happy with either possibility, then I have unrealistic expectations of my current investments.

Abso-frikkin-lutely!  You totally get it.  :D

Spending (and life in general) in retirement will be much the same - lots of flexibility, none of which should affect happiness.
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grantmeaname

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Re: Retirement 401k calculators - my projections and will this be enough?
« Reply #23 on: October 20, 2012, 10:20:07 AM »
However, what I'm trying to point out is retirement calcs use arithmetic mean and real investment returns use geometric.
Retirement calculators use whatever number you put into them; it's not like they're sentient. Lots of investment planners may use the arithmetic average growth rate rather than CAGR, but they're wrong, and they're misleading people through their own innumeracy. That alone doesn't make the future extra-unpredictable. It just means that you have to make sure you understand how annual returns work-- like you said, you can't use a linear average because it doesn't fit the phenomenon being described.

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I wonder what you mean by meaningful predictions that are rooted in reality?
I mean that over the last 140 years the CAGR after inflation has been 6.66%, and after all that time the corporation still remains the most effective way to conduct business, our economy still depends on citizens' capital, and there's no reason to think that the wealth of the western world will evaporate or that the stock market won't continue to reward investors for the use of their capital. It would be meaningful and reasonable for me to say "over the next 50 years a well-diversified investor can probably expect real returns in the range of 6-7% each year", but not to say "your investments will grow 6.66% faster than inflation in 2014".