I learned some interesting things about financing retirement yesterday.

I've been reading a financial book a friend recommended to me preaching the common methods on "how to get rich the safe way" through managing your 401(k) and IRA's and such. It's somewhat helpful in recommending what banks to use and laying out all of the details of each of the methods of saving and recommending a path.

At the beginning of the book there's this table similar to many others I've seen. It looks like this:

Smart Sally

Dumb Dan

When beginning to invest the person is

25 years old

35 years old

Each person invests $100 for...

10 years

30 years

At 8% interest at 65 they have

$200,061

$149,036

The basic gist is, starting young is incredibly beneficial. If the goal was to get to 200k Smart Sally could just stop saving for retirement at the age of 35 where Dumb Dan, at the same rate spent 30 years trying to make it and never did.

When can I be done?

Which got me thinking: what would I have to do to one day just be done saving for retirement? I wrote a script to determine just that. It ignores a few minor details which are probably negligible anyway when compared to the error margins in the assumption of inflation and assumed investment return, but gives good ballpark results.

I assume I'd like to retire on an income of today's equivalent of 50k after tax which is completely generated by the interest earned on my retirement savings. I assume I can maintain an 8% average earnings and account for a 3% inflation rate.

Without Further delays, here are the results.

Welcome to the Reverse Financial Calculator!

$50,000.00/year is $158,351.35/year when you are 65 assuming 3% inflation
To make that much money from an 8.00% interest you need $1,979,391.86

You can stop saving up if you reach a total savings of one of the
values in the STOP AT at the corresponding AGE.  If you want to hit
that goal starting from 0 you need to START PAYING the listed value per year.

AGE     STOP AT       START PAYING
26       $98,402.32  $98,402.32/year
27      $106,274.50  $51,093.51/year
28      $114,776.46  $35,355.00/year
29      $123,958.58  $27,508.99/year
30      $133,875.26  $22,819.90/year
31      $144,585.28  $19,709.20/year
32      $156,152.11  $17,500.34/year
33      $168,644.28  $15,855.05/year
34      $182,135.82  $14,585.38/year
35      $196,706.68  $13,578.56/year
36      $212,443.22  $12,762.81/year
37      $229,438.68  $12,090.27/year
38      $247,793.77  $11,527.81/year
39      $267,617.27  $11,051.75/year
40      $289,026.65  $10,644.72/year
41      $312,148.79  $10,293.69/year
42      $337,120.69  $9,988.69/year
43      $364,090.34  $9,721.98/year
44      $393,217.57  $9,487.41/year
45      $424,674.98  $9,280.09/year
46      $458,648.97  $9,096.04/year
47      $495,340.89  $8,932.02/year
48      $534,968.16  $8,785.34/year
49      $577,765.62  $8,653.75/year
50      $623,986.87  $8,535.38/year
51      $673,905.82  $8,428.63/year
52      $727,818.28  $8,332.13/year
53      $786,043.74  $8,244.74/year
54      $848,927.24  $8,165.44/year
55      $916,841.42  $8,093.36/year
56      $990,188.74  $8,027.74/year
57     $1,069,403.83  $7,967.93/year
58     $1,154,956.14  $7,913.33/year
59     $1,247,352.63  $7,863.45/year
60     $1,347,140.84  $7,817.81/year
61     $1,454,912.11  $7,776.03/year
62     $1,571,305.08  $7,737.74/year
63     $1,697,009.49  $7,702.62/year
64     $1,832,770.24  $7,670.38/year
65     $1,979,391.86  $7,640.77/year

Pretty cool right? The results say that if I pay about 20k a year I can stop putting money away for retirement in just 6 years, making my last payment when I'm 31.

When to Start

I also was interested in seeing what it would take to do that same 6 year goal if I put off starting the plan. You can see from the following results that putting it off does have significant cost to it.

START      STOP    PAYMENTS
26           31    $19,709.20/year
27           32    $20,665.96/year
28           33    $21,669.16/year
29           34    $22,721.06/year
30           36    $23,824.02/year

So the plan would cost about 1k more per year for every year I put it off. That's a lot, but it doesn't necessarily mean you should put everything aside and go out and start saving ASAP. As long as whatever you're doing, that's not allowing you to put significant money away is increasing your probable future income by atleast 3k (post tax) per year you should be in good shape.

People who work towards a PhD or an for example MD are not able to save much but will be able to handle that extra 4k/year easily once they've got a much higher paying job (schooling aside).

Anyone interested in trying it out themselves or modifying the results slightly can grab the source here.

Fun Fact:

If your parents had gone cheap with your baby clothes, crib and stroller and instead put 10k a year away from the day you were born, you'd be set for retiring at 65 on just your 2nd birthday!

AGE    STOP AT
0       $28,691.65  $28,691.65/year
1       $30,986.98  $14,897.59/year
2       $33,465.94  $10,308.63/year

Update Jan 1, 2014:

Some friends of mine have started a company that manages your retirement plan. They're brillint guys who have created a fantastic interface and intelligent algorithms. If you're interested in optimizing your retirement check out FutureAdvisor.