#78 - Have You Saved Enough?
Several months ago, I set out to calculate how much someone would have needed to save at any given age and spending level so that they wouldn’t have to save any more. The above image is the result of what I calculated. What does the above sheet tell us? First, the assumptions are inflation is 2.8%, the investment return is 7% until retirement at that point the assets are likely still invested but a safe withdrawal percentage is used in the calculation instead of a flat investment return, retirement is age 65, and 4.25% is a safe portfolio withdrawal rate in retirement. With those assumptions, the sheet says that a 35-year-old who wants to spend $3,500 in retirement (in today’s dollars) that has $297,263 invested may have already saved enough. This isn’t saying they can retire at age 35 but rather that they may not need to do additional retirement savings. Obviously, if the individual subsequently starts spending more, then the amount they would need to have invested to replicate that spending level in retirement would go up. Now would I tell someone to stop saving just because of this sheet? Probably not. Does it mean someone isn't on track to retirement if they aren't close to this number? Not necessarily. The numbers inputted are far from a guarantee. We have no idea what inflation will be, what investment return will be, etc. Also, there are several variables left out of the equation - taxes and social security being two of the bigger ones. I recognize these variables greatly discount someone’s ability to trust the specificity of the numbers. That begs the question - “Why does this sheet matter?”
If you aren't to that investment level, it can be a specific goal to shoot for (after adjusting for variables that affect you). Having a goal to shoot for can add motivation to saving.
If you are at that investment level, it is incredibly freeing to know that there is even the possibility you have already saved enough to retire at some point in the future.
You can see the impact your spending level can have on what you need to save. A higher lifestyle not only reduces the amount you have available to save but also increases the amount you need to save if your goal is to replicate that spending level in retirement.
If you want a copy of the sheet to update or change the variables, let me know.
Interesting Article(s) or Video(s)
New York Times - Biden Changes P.P.P. Rules To Help the Self-Employed
There have been several discussed changes to the PPP. Namely, allowing some business owners to use gross income instead of net income. This could allow many businesses to get larger loans. Note - Given how rapid this program changes, make sure you review current information. This article is from 2/22/21.
Thank you for reading!
Changes: Clarified the investment return only applied until retirement at that point the assets are likely still in invested but the calculation uses a safe withdrawal rate instead of flat investment return.