Retirement Time Value of Money
The age of mine as of first day of next month i.e. 01 August 2017 will turn into 20 years. I am considering a retirement age of 65 years, which leaves me with (65-20) = 45 years of investment for a healthy retirement. I would like to withdraw money for 25 years after retirement to continue to till 90 years of age. The total amount to be withdrawn per month is $500, i.e. $60,000 per year. Annual rate of interest is 7%.
The present value of money at age 64 that is to be withdrawn during age 65 to 90 can be calculate by the formula:
PV =
Here, Annual Withdrawal amount, P = $60,000
At 3% monthly inflation rate, this amount becomes, P = $126,901.17 ≈ $126,900
Total number of years, n = 25
Annual Interest rate, r = 7%
This gives, PV = $126,900 × ) = $1478839.70
Now, I am expecting to have this $1478839.70 amount at the end of the saving period, i.e. at the age of 65, which may be considered to be a future value, FV at the age of 20. I need to calculate the yearly payment, PMT for the period between 20 to 65 i.e. for a period of 45 years.
At the 2013 rate, the maximum federal social security income is $2,533 per month or $30,400 per year. Let us assume that the average pension paid by the HR of the job I would retire from is $1,800 per month or $21,600 per year. These leaves us with ($1478839.77–$30,400–$21,600) = 1426839.70 per year of saving.
FV = PMT
Here, FV = $1426839.70
Interest Rate, i = 12%
Number of years, n = 35
Rearranging the formula and plugging these values give,
PMT = = = $3305.42
Now,
Therefore, I need to save ($3305.42/12) = $275.45 per month in order to ensure a comfortable retirement.
Starting to save 5 years earlier would give a longer span of saving period, n =
FV = PMT
Here, FV = $1426839.70
Interest Rate, i = 12%
Number of years, n = 40
Rearranging the formula and plugging these values give,
PMT = = = $1860
Now,
Therefore, I need to save ($1860/12) = $155 per month in order to ensure a comfortable retirement.
So, starting 5 years earlier would reduce monthly saving to $155 from $275.45.
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