How Much Will I Need to Retire (Part 5...the Results)

In the first 4 parts of this series I explained why you should have at least as much income after you retire as you need prior to retirement. I set an example of a net income of $50,000 per year. It was determined that in order to have a net income of $50,000 per year and have it keep up with inflation, you would need to have $1.05 million in investments when you retire.

I then showed an example of a married family of 4. The husband and wife were each 31 years old and they had 2 kids ages 8 and 10. They went on a budget and paid off all of their debt in 3 years. They are now 34 years old, debt free except their house and have $1,300 in an emergency fund. They still have no investments. They do have $1,150 left over each month after they finish their budget.

The first thing this couple decides to do is to loosen the budget a little. They give another $170 per month to a church or charity, this means they are now giving 10% of their net income to a church or charity. They still have an extra $980 left at the end of the month. Each spouse takes and extra $10 a week for spending money. That leaves $900. They then decide to put $150 per month back to save up to replace their cars. They have $750 per month left over and they decide to add that to their emergency fund. They decide to take a year to build their emergency fund. After that year they have added $9,000 to their emergency fund.

They are now 35 years old, are debt free except for their house, have $10,300 in an emergency fund and have an extra $750 left at the end of each month. They then decide to add $50 to the $150 they are saving to replace their car. That leaves $700 extra at the end of the month. They take $100 and use that for a "date night" for the parents. They can hire a baby sitter and go someplace nice once a month. They also take $100 and set it aside for a vacation. $1,200 is not going to be an elaborate vacation, but you can get away for a few days and have some fun. That leaves $500 extra at the end of the month. They then invest that into retirement accounts.

If they invest that in an IRA that averages 10% growth and has averaged growing in 7 out of 10 years, by the time they are 65 years old, they will have $912,012. That is not quite the $1.05 million they were shooting for, but it is not bad. If they take 6% out of that $912,000 each year, that is $54.720 before taxes. Earlier we used 20% for taxes so we will use that again. That means they will net $43,776 per year. I hate to count on Social Security, but the average net Social Security income is about $11,000. When you add that, they are over $54,000 per year and passed their goal!

But wait a minute, this couple was smart. Instead of investing in a regular IRA, they invested in a Roth IRA which means their earnings were tax free. They got $54,720 per year BEFORE Social Security.

For those who are concerned about inflation. I did not factor in inflation in arriving at these figures but I also did not factor in any raises or bonuses so they should have canceled out.

I know some people may say this is a great example for a 35 year old, but what if they started saving sooner or later. Here are the figures if they saved at the following ages and saved until age 65.

1. At age 25 they would have about $2 million!
2. At age 30 they would have about $1.4 million
3. At age 40 they would have about $543,000
4. At age 45 they would have about $284,000
5. At age 50 they would have about $186,000
6. At age 55 they would have about $106,000.

As you can see, the key to having success is to get out of debt, stay out of debt and start saving as soon as possible. And remember, it's never too late to start saving for retirement. It is better to have $50,000 or $100,000 saved for retirement than to have nothing.

Have a happy retirement!