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TVM Games
I have an old “Business Calculator” from HP (its is called a 17B-II) and I have a lot of fun playing with Time Value of Money (TVM) and day dreaming about retirement savings. Well, its fun when the markets are going up, anyway. There are plenty of TVM calculators on The Internet these days that will do the same thing. TVM is usually used to calculate loan payments and generate amortization tables. When doing retirement calculations the “payment” is incoming, not out-going, and the “Present Value” isn’t the loan amount, but rather your savings amount, but with a little adjustment the formula still works.
The idea is that when you have a pile of retirement savings, you are not just drawing out of it, because it is earning a return at the same time. On the other hand, it is also not reasonable to assume that you will just “live off the interest” because few of us have enough money to afford that. Rather, you will be slowing drawing down the principal as it continues to earn new money. With this simultaneous inflow and outflow it can be difficult to understand how much consumption of the original savings is “enough” to make it last, and that is what TVM helps with.
In the context of retirement savings, the variables of TVM would be;
A) Years in retirement (Life Expectancy)
B) Interest Rate (assumed annualized return on investment)
C) Present Value (The savings you have today, or at the start of retirement)
D) Future Value (what you want to leave as a residual estate the day you drop-dead)
E) Payment (the calculated annualized amount that you can afford to draw-down from “C”, offset by “B”, that will allow you to have “D” left by the time you reach age “A”.)
So, as an example;
A: Retire at age 65 and plan for the money to last until age 100 (35 years)
B: Assume 2%. Now, this has a built-in inflation adjustment. I fully expect that the real return will be better than 2%, but this is saying that over time I plan to earn 2% better than the average inflation rate (still pretty conservative, I think). This also means that inflation is accounted for in the calculations, and therefore all figures are automatically adjusted to today’s values in 2008-dollars.
C: Let’s say a PV of $1,000,000 in 401(k)/IRA/Savings at retirement age. Because of the way most TVM formulas work (they are usually used for loan amortizations), this figure usually needs to be entered as a negative value.
D: Since I don’t want to be completely penniless at age-100, let’s assume a FV of $100,000 (2008 dollars) will be left at age-100. If you die before age 100 of course there will be a lot more in your estate. If you are VERY sure that you will die before 100 and want to spend every dime by then, you can set this to $0 and that will bump the payment a little.
E: The TVM calculated “payment” with these assumptions is; $38,000. This means that if I start with $1M and earn an average of 2% better than the inflation rate over the next 35 years, I can afford to pull out $38,000 (2008-dollars) per year, and still have $100,000 (2008-dollars) left at age 100.
If I can also expect a defined-benefit pension of $15,000 per year and Social Security of $20,000 per year, then my targeted retirement income should be $73,000/year in 2008 dollars.
Of course, this formula can be rerun periodically to check to see how you are doing. Although this calculation is assuming “averages”, those averages will be extremely hard to maintain if you get “behind the curve” early in the process. On the other hand, if you get ahead of these assumptions, you shouldn’t just run out and blow it on BS. You never know when that extra cushion is going to be necessary because of unforeseen expenses or a few bad years in the market.
The idea is that when you have a pile of retirement savings, you are not just drawing out of it, because it is earning a return at the same time. On the other hand, it is also not reasonable to assume that you will just “live off the interest” because few of us have enough money to afford that. Rather, you will be slowing drawing down the principal as it continues to earn new money. With this simultaneous inflow and outflow it can be difficult to understand how much consumption of the original savings is “enough” to make it last, and that is what TVM helps with.
In the context of retirement savings, the variables of TVM would be;
A) Years in retirement (Life Expectancy)
B) Interest Rate (assumed annualized return on investment)
C) Present Value (The savings you have today, or at the start of retirement)
D) Future Value (what you want to leave as a residual estate the day you drop-dead)
E) Payment (the calculated annualized amount that you can afford to draw-down from “C”, offset by “B”, that will allow you to have “D” left by the time you reach age “A”.)
So, as an example;
A: Retire at age 65 and plan for the money to last until age 100 (35 years)
B: Assume 2%. Now, this has a built-in inflation adjustment. I fully expect that the real return will be better than 2%, but this is saying that over time I plan to earn 2% better than the average inflation rate (still pretty conservative, I think). This also means that inflation is accounted for in the calculations, and therefore all figures are automatically adjusted to today’s values in 2008-dollars.
C: Let’s say a PV of $1,000,000 in 401(k)/IRA/Savings at retirement age. Because of the way most TVM formulas work (they are usually used for loan amortizations), this figure usually needs to be entered as a negative value.
D: Since I don’t want to be completely penniless at age-100, let’s assume a FV of $100,000 (2008 dollars) will be left at age-100. If you die before age 100 of course there will be a lot more in your estate. If you are VERY sure that you will die before 100 and want to spend every dime by then, you can set this to $0 and that will bump the payment a little.
E: The TVM calculated “payment” with these assumptions is; $38,000. This means that if I start with $1M and earn an average of 2% better than the inflation rate over the next 35 years, I can afford to pull out $38,000 (2008-dollars) per year, and still have $100,000 (2008-dollars) left at age 100.
If I can also expect a defined-benefit pension of $15,000 per year and Social Security of $20,000 per year, then my targeted retirement income should be $73,000/year in 2008 dollars.
Of course, this formula can be rerun periodically to check to see how you are doing. Although this calculation is assuming “averages”, those averages will be extremely hard to maintain if you get “behind the curve” early in the process. On the other hand, if you get ahead of these assumptions, you shouldn’t just run out and blow it on BS. You never know when that extra cushion is going to be necessary because of unforeseen expenses or a few bad years in the market.
Retire on $3000.00 a month-Possible ???
36k a year to live on with no debt...I believe I can make a go of this as the life style of my wife and I is quite simple, don't demand much...some golf and a little travel will work just fine for us..health is good and expect to get medicare at age 65
12k per year my SS
10k per year wife SS
14k per year from savings
Live in Wisconsin , cost of living is reasonable...
Thoughts?????
12k per year my SS
10k per year wife SS
14k per year from savings
Live in Wisconsin , cost of living is reasonable...
Thoughts?????
Grow the Nest egg
I am hoping to retire in three to five years. My job is stressful but I like the people I work with and would miss them terribly. Seeing them for lunch would not be the same. I'm afraid to retire because I know that I need a purpose and my job has always fulfilled me that way. I think that I will have enough money to do what I want to do -I'm fairly frugal and don't like to have a lot. I am a writer at heart and love travelling -I'm not worried about keeping busy. I'm more worried about "purpose".
Thank-you
Vall Vonn
Thank-you
Vall Vonn
Spinning my wheels??!
I just turned 51 and have have some ETF's but I don't have a lot to invest. My mother passed away last year in debt, and with no assets. She never managed her money and I learned what not to do from her. I will probably always work but want to start my own business using the internet. Does anyone have knowledge about or running an e-currency business?
"CYA" Financially Speaking
Turned 65 in March. Retired at 62 with the "Bride", (of 45 yrs). Generous returns on real estate in 2005 allowed us to join the (7) figure net worth, (just barely) club. We grew up in Brooklyn, (yeah, the only Brooklyn), neither went to college, worked, and raised a family.
That said, after learning how much we were worth, I did due diligence and found a financial planner.
After several meetings, he told me I was one of his very few clients who had elected to protect our assets with Long Term Care Insurance, even before receiving his financial advice. Many of these clients were high earners with respectable portfolios. Even after his recommendations, many have still not elected to follow his advice.
I seriously doubt I have to remind readers of this board that LTC costs are spirialling out of control and at $75,000 per year for care, assets of all but those belonging to the mega-rich will quickly evaporate.
I guess you can file this post under "Peace of Mind"
Going forward, I'll post additional "free advice" from that which (I've) paid for, as well as that garnered from life's experience.
P.S. Bonus points to whomever picks up on the anomaly of this poster.
That said, after learning how much we were worth, I did due diligence and found a financial planner.
After several meetings, he told me I was one of his very few clients who had elected to protect our assets with Long Term Care Insurance, even before receiving his financial advice. Many of these clients were high earners with respectable portfolios. Even after his recommendations, many have still not elected to follow his advice.
I seriously doubt I have to remind readers of this board that LTC costs are spirialling out of control and at $75,000 per year for care, assets of all but those belonging to the mega-rich will quickly evaporate.
I guess you can file this post under "Peace of Mind"
Going forward, I'll post additional "free advice" from that which (I've) paid for, as well as that garnered from life's experience.
P.S. Bonus points to whomever picks up on the anomaly of this poster.
Am I Set?
I'm VERY excited to have found this group. I love to share saving ideas, and would like to learn how others save.
I've been a "saver" all my life. I have raised my family, and do not have any debt.
I use a credit card for cash purchases (I hate carrying cash), and pay the billed balance every month.
I have invested cash into various CDs, arranged so that several of them mature every month (I did this early in my savings life, so that I would never be more than 30 days away from access to invested cash---this is what some might call an emergency fund---amazingly, I've never yet had to cash one out).
I put the maximum amounts in a ROTH IRA every year, and 25% of my salary in my company's 401(k). My employer contributes 4% of my annual salary into a retirement fund that's somhow connected (don't understand how) to my 401(k) account.
I live in a home that was purchased in 1972. I'd like to do home improvements but don't want to delve into savings (I want to have it to live on when I no longer have an income), so I'm doing improvements a little at a time.
I'm constantly looking for ways to save money.
Can anybody provide ideas on how I can save more....or better yet, more effectively?
I've been a "saver" all my life. I have raised my family, and do not have any debt.
I use a credit card for cash purchases (I hate carrying cash), and pay the billed balance every month.
I have invested cash into various CDs, arranged so that several of them mature every month (I did this early in my savings life, so that I would never be more than 30 days away from access to invested cash---this is what some might call an emergency fund---amazingly, I've never yet had to cash one out).
I put the maximum amounts in a ROTH IRA every year, and 25% of my salary in my company's 401(k). My employer contributes 4% of my annual salary into a retirement fund that's somhow connected (don't understand how) to my 401(k) account.
I live in a home that was purchased in 1972. I'd like to do home improvements but don't want to delve into savings (I want to have it to live on when I no longer have an income), so I'm doing improvements a little at a time.
I'm constantly looking for ways to save money.
Can anybody provide ideas on how I can save more....or better yet, more effectively?
Just one thing......
new member to eons and to the group. I plan on retireing soon and as with everyone, worry about my money running out. I think I'll be ok except for inflation. Debt free (does anyone listen to Dave Ramsey)!
My goal is to invent "one thing"...or manufacture "one thing". I don't mind working, have all my life, just want to cut back and be able to travel and spend time with granddaughter!
Any ideas?
My goal is to invent "one thing"...or manufacture "one thing". I don't mind working, have all my life, just want to cut back and be able to travel and spend time with granddaughter!
Any ideas?
Supplementing retirement with internet?
I have been looking at several ways to make money on the internet and just wondered if any of you were able to make enough to help with your retirement? We're still working on credit card debt, and I just got approved for google adsense. Has anybody had any experience with it, or any other online jobs?
Grow the nest egg 101
Money Talk: How do you grow your nest egg? With your help we'll hit topics ranging from assessing the state of your personal savings to finding a financial adviser to creating the right portfolio balance for you. We hope you'll join in the discussions and bring your experiences with you.
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