Right now I’m reading Yes, You Can Still Retirement Comfortably! by Ben Stein and Phil Demuth, at the recommendation of my friend Trip of Musing Money. So far it’s pretty good. I’m not quite done, but as part of the book it gives you a step-by-step procedure to estimate the nest egg that you’ll need when you reach your desired retirement age. It’s all based on historical market returns and life expectancy charts which I’ll leave to those who buy the book, but here are the rough results for my wife and I together:
1) Estimate Post-Retirement Income Needed. A suggested estimate is 80% of your (expected) final salary when you retire. I’m going to estimate this at 80% of $120,000, or $96,000.
2) Factor in Social Security. They say you should then subtract what you expect from Social Security. You can use the SSA.gov Benefit Calculator for this, and then multiply by 75% or whatever you think is reasonable due to all the doom and gloom we hear. I’m pessimistic and think 0% is reasonable, so subtract $0.
3) Factor in Pensions. We have no current pensions, and don’t expect to get any in the future. Another $0.
4) Calculate Nest Egg. Find the proper multiple based on their charts and certain variables. Their earliest option for retirement is 60 years old, which is a bummer since we want to retire earlier than that, but it’ll do. So at 60, and at a 99% probability that my portfolio will allow us the income we want, and also a 99% chance we won’t outlive the portfolio, the multiplier was 21.3.
So, 21.3 x ($96,000 – 0 – 0) = $2,044,800. (inflation adjusted)
So a cool 2 mil by 60. Of course, this is dependent on the assumption that you are also investing as they recommend, which I haven’t gotten to yet. Per their charts, this also means we should be saving about $15,000 every year in tax-deferred retirement accounts every year starting now to reach this goal. Yikes! We put away more than that last year, but this year that may be tough.
p.s. If we assumed Social Security is 100% solvent, our Nest Egg Number would be more like $1.4 million.
By Jonathan Ping | Retirement | 1/18/06, 7:36pm