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Introduction
The purpose of this project is to gain an understanding of the effect of start date, rate of return, inflation and taxes on what it will take to save a set amount of money by the time I retire at age 65. Different starting ages are explained: 25, 35, 45 and 55.
Effect of Start Date and Investment rate of Return
The table below summarizes the effect of start date and investment rate of return on the retirement savings and lifestyle.
The dollar amounts that I have to save if I earned either 8% or 10% return on my investments are given in table 1 on the ‘Savings/Year’ column. The percentages of my pay that I would have to save are given on the ‘% of Income’ column on the same table.
Effect of Taxes on the Retirement Savings
The present value (PV) is $1,000,000 while the future value (FV) is 0. The rate is 0.005 (6%/12) and the number of payment per annuity is 360 (30 *12) months. Using Excel’s PMT function, I determined that the amount that I can withdraw annually from my investment savings and still have it last 30 years is $71,946.06 (12 * $5,995.51).
The following are the calculations, subtracting federal tax of 20% from the annual amount: $71,946.06 – (20% *71,946.06) = $71,946.06 – 14,389.212 = 57,556.848. Therefore, the actual amount available annually to buy my retirement lifestyle is 57,556.848.
I can live comfortably in retirement on this amount of income as long as my needs remain basic. However, some factors might affect my ability to live comfortably on the calculated amount. The factors include inflation, unfavorable government policy, and emergency needs such as high medical bills. Inflation decreases the value of the money. Government policies can cause inflation and negatively affect prices of items. Emergency needs such as huge medical bills means using more money than expected.
Effects of Inflation on Savings Goal
The real rates of return are as follows: 10% – 3% = 7% and 8% – 3% = 5%. The table below summarizes the effect of inflation on the retirement savings and lifestyle.
The amounts that one would need to save annually (for the different starting age) to have an amount of retirement saving that has the same purchasing power at age 65 as $1000000 today are shown in the ‘Savings/Year’ columns of table 2.
Conclusion
It is best to begin investing for retirement as early as possible. In my case, I would begin investing at 25 years of age. A higher investment rate of return allows one to save lesser amount to attain a specific saving goal than a lower investment rate of return does. Inflation increases the amount of money that is required to be saved to achieve a particular investment goal. This project has indeed helped me understand the significance of having goals and planning to achieve those goals.
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