The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: dfree86 on October 01, 2016, 12:38:26 PM
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Hi All,
Still fairly new to all of this, but my wife and I have spent a couple of years maxing out our 401K and Roth IRAs per Mustachian dicate. Those accounts amount to approximately $110,000. They're split up mostly in good Vanguard/TIAA-Cref index funds and ETFs (whever possible). Return rate for the last five years has been about 6%.
We both like working and aren't look toward any kind of super-early retirement. But we both just turned 30 and I was curious what would happen if we stopped funding all retirement accounts today. (We won't. Thought experiment.)
What's the (simple?) calculation to determine how much that $110,000 is likely to be worth when we are 65 and can access it?
Basically, we've been massively funding our "aged 65-100" pool and I want to be able to quickly calculate how much the current amount we have is likely to be when we finally need it.
We're about to buy a house and so if I can divert some of that pre-tax 401K money we've been using to max our retirement spending, it might get us to a house sooner. Kid won't be long after that (I hope!), so then we're looking at 529. Basically at what point might I be able to say "I think we're good" on the retirement contribs and starting putting that money to other use.
Thanks! (And sorry. I played around with various calculators but I'm about as math illiterate as you'll find!)
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Run firecalc and cFIREsim.
Also, you can access Qualified retirement accounts well before age 65. Without any effort, you can access them at age 59.5. With a few other bells and whistles, you can access them well before then. Numerous posts on this board about that topic.
You probably should read all of the posts on this site.
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http://www.csgnetwork.com/interestcomplexsavcalc.html
$110,000 invested for 35 yrs at 6% will result in $845469.55. You'll still have to pay tax on this when you withdraw it.
But this assumes that the 6% is constant and you don't have any fees. Many on this forum (including me) would recommend that you continue to contribute a while longer and take advantage of the pre-tax status of this money. It's better to end up with too much money later than not enough.
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What's the (simple?) calculation to determine how much that $110,000 is likely to be worth when we are 65 and can access it?
Future Value = Present Value * (1 + interest rate)^(number of years)
For
Present Value = 110000
interest rate = 6% = 0.06
number of years = 35
we get
Future Value = 110000 * (1 + 0.06)^35 = 845469.55, as Choices noted.
That answer is as good (or bad) as the assumption of 6% turns out to be.
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dfree86: First, congratulations on and your spouse maxing out your retirement
accounts. You both rock.
Since we're engaged in an interesting Gedankenexperiment, let's rewind
and assume at age 30 you haven't put in a single dime into your retirement
savings. How much would it take to catch up?
If we invert the problem and assume a final retirement balance of
$845469, we can treat it as a 35 year mortgage at 6% interest. You'd
need to contribute $627 every month -- for the next 35 years -- until
you retired at age 65 to equal the contributions you've already made
in your 20's!
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No one has mentioned that with 3% inflation for 35yrs, your $845,000 only has the buying power of $290,000. Sorry about that.
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No one has mentioned that with 3% inflation for 35yrs, your $845,000 only has the buying power of $290,000. Sorry about that.
That's accounted for if the 6% was a real return, not nominal. It would then be 845k in today's dollars. I would assume that's the case, one should always use real returns (to avoid having to come up with an inflated number, then do a second calculation to discount it, the way you did).
OP: We can't tell you what it will look like, because we don't have a crystal ball. The best thing to do would be to get a reasonable range. There's two ways to do this:
1) Look up what a "monte carlo" simulation is, and run it. A few times. That'll give you a low and high range.
2) Look up cFIREsim, and see what it would have been worth historically after 35 years over the various timeframes. That'll give you ~100ish results, and a low and high range.
Combine 1 and 2 to get some reasonable approximations of what it might be worth. It'll be a broad range, depending on how the markets go, and in what order, over the next 3.5 decades.