Sunday, February 24, 2008

The Ultimate Savings Goal (for me)!

This morning I worked on an excel spreadsheet that I have used to determine how much I ultimately want to save up to be able to sustain my current life. I figured in savings in my 401k and a taxable account. I did not take into consideration taxes.

On my spreadsheet I took my current salary and increased it by an annual raise of 4%. Since I've been there my raises have been higher but I like to be conservative in my estimates. So, if I get no higher of a raise then 4% and no promotions to higher pay grades then I will be making approximately 182k by retirement age of 65. Honestly I'd like to retire sooner but that's going to depend on how well I progress towards my savings goals.

Next I figured out how much I feel I need after retirement to sustain the same standard of living. I decided that in retirement, I would need about 80% of my current income. This is probably a little more then I will need because hopefully I will not have a house payment at that time. To come up with 80% I just figured that if I am saving roughly 20% of my salary during my working years I won't be saving while I'm retired. Thus I figured I need 20% less. This is again pretty conservative I feel. I took the 80% of current salary I figured I would need and adjusted it with a 4% level of inflation out until I am age 95. I figured if I live that long then I'm doing good and honestly I hope I don't live that long. If I pass in my 80's I will be happy.

So next I took my retirement savings. I took what I currently have and what I will be saving into retirement each year from my salary and adjusted it for a return of 8%. Hopefully I can get more of a return but I like to be conservative. I grew this account up to retirement age(65).

I also have a taxable savings account where I took current savings and grew it by about the amount it currently grows and adjusted it for a gain of 6.5%. I will have most of this money in mutual funds so I expect it to earn me a high return. I did this through retirement age as well.

Once I hit retirement age, I took the amount I figured I would need to live off of and divided it by two. I took half of that from the retirement account and half from the taxable savings. I switched the return on those accounts to 5% because they will now be invested in a mix of bonds and stocks. I continued to decrease these accounts by taking out what I would need to live. Once taxable savings was down to 100k I took only from retirement savings. I decreased these accounts until the age of 90 and if I live to 91 with this plan I will be completely out of money.

Anyways, these are all really really rough estimates. In the long run I could need more I could need less. I may live off of half my current salary when I retire. I didn't take into account a pension I plan on receiving from work. I didn't take into account the fact that my highest expense should be gone by retirement which is mortgage or rent. But I said I wanted to live without worry. I wanted to be able to be at financial peace with myself. Therefore, I took the numbers I came up with that I would need at retirement to come up with my goal number. At retirement I figured I would need roughly about 3.5 million. Therefore, my goal savings number is going to be 4 million by retirement. With that number as my target, I will work out a plan to achieve that goal.

By the way, I said I am not worried about being incredibly wealthy and to me 4 million sounds incredibly wealthy. However, once you take into account inflation and the fact that I plan on living off of this savings with no other income for 25 years, this is not a lot of money. Today it is. In 2050 it will not be. Four million is my ultimate goal and next I will work on plans to reach that goal through mini goals.

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