When Can I Stop Saving for Retirement?
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:
When beginning to invest the person is
25 years old
35 years old
Each person invests $100 for...
At 8% interest at 65 they have
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.