Scenario 1:
Starting Amount: $0
Years to Save: 25 (based on an assumption of living to 85)
Rate of Return: 4% (but could be anything, I think, as long as I use the same value in each scenario)
Additional Contributions: $1,423/month, compounded monthly
Growth in a taxable account | |||
cgt = capital gain tax rate, % | 15.0% | ||
d = annual dividend rate, % | 2.0% | ||
g = annual growth excluding dividends, % | 2.0% | ||
n = years invested, yr | 25 | ||
Compounding periods/yr | 12 | ||
P = principal invested at start, $ | $ | ||
Pmt = Recurring deposits, $ | $1,423 | ||
1 = pmt at start, 0 = at end | 0 | ||
t = tax rate on dividends, % | 15.0% | ||
nc = Number of compounding periods | 300 | ||
dc = compounding dividend rate, % | 0.167% | ||
gc = compounding growth excl. div., % | 0.167% | ||
e = tax-adjusted growth, % | 0.308% | ||
ecgt = tax-adjusted cap. gain tax rate, % | 8.108% | ||
Basis | $552,703 | ||
F = Future, after tax, value | $678,507 |
Scenario 3:
Starting Amount: $0
Years to Save: 38
Rate of Return: 4%
Additional Contributions: $692/month, compounded monthly
Growth in a taxable account | |||
cgt = capital gain tax rate, % | 15.0% | ||
d = annual dividend rate, % | 2.0% | ||
g = annual growth excluding dividends, % | 2.0% | ||
n = years invested, yr | 38 | ||
Compounding periods/yr | 12 | ||
P = principal invested at start, $ | $ | ||
Pmt = Recurring deposits, $ | $692 | ||
1 = pmt at start, 0 = at end | 0 | ||
t = tax rate on dividends, % | 15.0% | ||
nc = Number of compounding periods | 456 | ||
dc = compounding dividend rate, % | 0.167% | ||
gc = compounding growth excl. div., % | 0.167% | ||
e = tax-adjusted growth, % | 0.308% | ||
ecgt = tax-adjusted cap. gain tax rate, % | 8.108% | ||
Basis | $487,221 | ||
F = Future, after tax, value | $658,890 |
Well, I would approach the problem differently.
I would set up whatever you consider the default scenario (say, Scenario #1) in cFIREsim with all of your other data in there, save the data set, and then run the calculations and see what the result is. Usually people focus on the success percent given a certain withdrawal rate.
Then I would reload that first dataset, change the pension to the next scenario, save that dataset with a different name, and then run the calculations and see what the result is. If the success percentage goes up, then I'd consider making that my choice (considering any tradeoffs, like having your wife work longer or whatever).
My point is twofold: (1) that cFIREsim can handle your situation without you have to do outside calculations and assumptions ahead of time as your OP implies, and (2) the most optimal scenario from a safe-withdrawal-rate-success point of view may be different than the scenario that compounds to the most money. The reason this second point is important is that the magnitude and the timing of the payments could produce a different result than a compounding calculation, because a chunk of money early on may get you past a historically rough early period even if it doesn't add that much to a compounded pile of money.
Thanks, MU. What would you use as an inflation rate? I've thought about this for a while too, and I'm not sure how to approach that part of it.