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Hopefully, that is not the case but certainly not an unheard of scenario considering many new graduates are strapped with significant debt coming out of school. For all three scenarios, we will assume he has no retirement savings to date. So, let’s get back to our example of a male born in 1984 and look at three different scenarios. If you want to be more conservative or aggressive, you can make those changes when running the numbers yourself. Some could argue the 6% isn’t very conservative and 8% isn’t very aggressive, but for the ease of making these assumptions, let’s go with it. For now, let’s make it simple by choosing a lower assumption (such as 6%) if you tend to be more conservative and a higher assumption (such as 8%) if you tend to be a bit more aggressive.

In future articles, I will spend lots of time covering types of investments, advantages/disadvantages to those investments and factors to consider when putting together a portfolio that matches your goals and risk tolerance. Third, what rate of return do you anticipate you will get on your investments before and after retirement? While much of this is out of our control based on the volatility that comes along with investing, a projection can be made based on how conservative (assumed lower %) or how aggressive (assumed higher %) you may be in your investment approach. In this case, an assumption of 100% of today’s salary (in future dollars) is reasonable or maybe even 120% depending on your desired lifestyle during retirement. The counter to this argument could be for someone that desires to have significant expenses in retirement (e.g., travel, buying a second home, etc.) or would like to be in a position to give away money at a rate he/she wasn’t able to do during the working years. For example, during retirement, the goal would be to have a paid off home without any monthly mortgage payment like was being made during working years. Often you will hear that a lower percentage of your income (such as 80%) is reasonable to have during retirement with the assumption that expenses during one’s working career will be higher than that during retirement.

80%? 100%? 120%? You can choose any number depending on your desired lifestyle in retirement. Second, what percentage of your income during the working years do you want to have available in retirement. When we make assumptions on the factors noted above, we need to keep a few things in mind.įirst, what is your desired retirement age? Yes, lots can change along the way for lots of reasons but if you could choose your desired retirement age right now, what would that be? This will have a significant impact on the calculations as you will see in a minute. For this example, let’s assume this pharmacist is making $120,950 the median pay cited by the 2014 Bureau of Labor Statistics. Therefore, if this individual were planning to retire at the age of 65, he would have to have funds available to live for 17 years beyond the date of retirement. You can then change the assumptions and run through it yourself.Īs of today, if a male were born in 1984, he is expected to live to be 82 years old (check out your own life expectancy at ). Therefore, let’s walk through an example together that has three different scenarios to highlight how changing one or two variables can have a significant impact on the result.

While this won’t be a perfect assumption considering variables that can come into play that have a significant impact on the end goal such as uneven growth in investments through the working years, unpredictable changes in income, and investments fees, it is a good place to start. Once we make these assumptions we can come to a dollar amount needed to reach financial independence or better known as the point when one can retire and replace his/her income without having to work.

Rate of return on our investments before and after retirement.

Percentage of working income needed to live each year in retirement.

In order to estimate a dollar amount needed to retire, we need to make some assumptions including the following: Take a minute to answer the following questions:Īssuming you will retire at 65 and die at 82 (morbid, right?), how much money do you think you will need to have saved for retirement? Furthermore, what factors led you to come up with that figure?

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