By elmads

Before we move forward, you can download my spreadsheet for free on the link provided below.

If you prefer audio contents than written words, click on the link below for the audio version of this blog.

Audio Blog 2/2 – The Inflation Adjusted Retirement Calculator

This is the 2^nd part of the instruction on how to understand and use the Retirement Calculator. If you haven’t read the Part 1 of this blog, then I highly suggest for you to read it in order for you to understand it fully. Link Provided below.

Part 1/2 of the Inflation Adjusted Retirement Calculator

In the Part 1 of this blog, I explained how to arrive into our future inflation adjusted expenses depending on our current lifestyle expenditures and/or our projected lifestyle expenses.

In this 2nd blog, I’ll guide you into knowing how much do you really need for your retirement pot, which is purely based on your previously calculated inflation adjusted lifestyle expenses. And, how much will you need to invest per month and/or per year to attain that retirement pot.

SCENARIO (which is the same in the part 1 of this blog).

We have Apple who is currently 30-years-old and plans to retire at age 70. She is currently married, has a child, renting, has a simple car of her own, and is employed. She’s is currently residing in the Philippines, and works there as well. She plans to invest money for retirement, the problem is she doesn’t know how much she’ll need for it, and how much money she’ll need to invest per month in order to hit her required retirement fund.

From the previous blog, we calculated that Apple’s Yearly Inflation Adjusted Lifestyle Expenses at age 70-years-old will be worth 897,844.84 PHP.

The Process – How much money you need to have for your retirement fund

Retirement Withdrawal Rate Cell

Remember when we retire, we are not working and are not part of the employment workforce anymore. This means that we will not have any active salary – our time and effort traded for money. That’s why saving and investing money for retirement is crucial, as it will be the source of our income, the monetary lifeline for us to survive retirement life. With that retirement pot that we have accumulated for decades, we will need to take a portion of it per month or per year to supplement our needs. Hence, the term the withdrawal rate.

This cell is integral in this calculation. It asks the question, what percentage of your retirement fund will you be withdrawing per year in order to sustain your annual retirement lifestyle? this would be a hard question to answer for most people, because some might just blurt out a random percentage number without a reasoning and rationale behind the percentage number they entered in this cell.

Actually, 4% is one of the best number we could use here, I didn’t made that up. This percentage number came from a study done by William Bengen. He is a retired financial advisor who made the metric called the 4% Withdrawal Rate Rule, which states that retirees can withdraw 4% of their total portfolio in the first year of retirement. It is a study and research paper done by Mr. Bengen in order to give guidance and help to the soon to be retirees. It is for them to know how much they would need to sustain more than 20 years of their retirement lives. This also in turn considers that the retirement savings of the retirees are still invested in various less volatile investment instruments, so as it could still continuously outpace or keep up with inflation.

This is considered as the guiding milestone in the personal finance world. It has been used as the determinant of how much money will people need to sustain a long-lived retirement life.

That being said, other people use now around 5% for this metric instead of 4%, this is because the current landscape of finance and economics have massively changed when compared to these past decades. Monetary Policies, Fiscal Policies, Technological advancement and a lot more. The 4% rule was made in 1994 during a time where the internet was still at its infancy.

Furthermore, if you plan to retire earlier than your 60s, probably at age 40s-50s. Then your safe withdrawal rate should be less than 4%. This is a realistic and conservative view about it, because your time frame for your retirement will be longer than 30 years, meaning your retirement pot would need to be larger as well.

Let’s go to our Apple scenario. She used the 4% withdrawal rate for her retirement, How much then would she need as the final total retirement pot?

Formula;

Goal Retirement Savings = Inflation Adjusted Yearly Expenses / Withdrawal Rate

Apple will need to have a retirement savings pot worth 22,466,121.03 PHP to sustain 25 years of her retirement life based on her Current Lifestyle Expenses. Withdrawing 4% from her retirement pot worth 22 million PHP, will give her a yearly withdrawn money worth 897,844.84 PHP (4% of her 22 million PHP), which will help sustain her life for 25 years.

You might be asking how did I get the 25 years? To get that number just divide Your Goal Retirement Savings by your Inflation Adjusted Yearly Expenses. Let’s use the numbers in our example.

Number of Years = 22,466,121.03 PHP / 897,844.84 PHP

  = 25 Years

NOTE: You might be thinking that the 22 million PHP in our example is too much. Remember that the goal retirement savings is derived from your inflation adjusted expenses in the future, that's why it expected that the retirement pot will also balloon in the process. Inflation is a pain in our pocket, it is one of the certainties of life, that all of our expenses will be 100% expensive in monetary terms in the future. Included with that is our retirement pot, it is just how it is. It is either we complain that life is unfair and that everything is rigged, or we find ways to improve more and make our lives comfortable and easier, not just for ourselves, but also for our family.

Congratulations!! We now know how to get the specific amount of money for our retirement. But wait, how do we get that needed amount of money by just investing? and how much money should we save and invest per month to reach that goal?

The Process – How much money we need to invest monthly and/or annually?

Investment yearly rate of return cell

This is the core of how much money we will need to invest per month in order to arrive to our retirement pot goal. There are a lot of assets to invest in, which could make this investment journey tricky and hard to tread. Some people will be able to reach their goals through Stock Market investing, while others via Real estate investing. One of the best ways to accumulate wealth overtime is to firstly; invest on assets that you truly understand and secondly, investing in your continuous knowledge and growth mindset and thirdly expand your earnings power. There is no one true best asset, but there is an asset that will truly resonate with you, that will jive with your personality, time and effort. That’s why continuous learning and knowing your temperament is very important in the game of investing. To know more about assets see my blogs titled “The 5 Basic Asset Classes” and also “Diversification”.

That being said, if you want to start to invest via the stock market but you are not keen into digging deeper, to study and do research about the capital and equity markets, then mutual funds is always the get go. This is the easiest way to invest and get exposure into the equity and bond markets without requiring too much time and effort. To know more about mutual funds, see my blogs titled “Mutual Funds” and “Passive and Active Funds“

If we base the return of the general market, via investing through Mutual Funds, we’ll be able to deduce a good rate to enter in this cell. General Market Indices’ average annual return for a long period of time has been around 5-10%, depending on the index. We could use any percentage number actually, less than 10% is the ball park area.

But, what if I use more than 10% yearly return? that’s fine but it’s mostly applicable for active investors who try to beat the general markets. These are the investors who digs deeper into the investment world, analysing, studying and researching about companies (stocks), properties (real estate), commodities, and other assets. Try it, maybe you also have the affinity for active investing. It is actually worth it most especially if you learn to love the process, you could check my blog titled “The Popular Investing Strategies”. Nonetheless, for most people who just wants to make money work for them without additional effort, then index mutual fund investing is the way.

I’ll be using 7% for this cell as the estimated annual rate of return. This is the yearly return that most mutual index fund worldwide have over a span of 2-3 decades.

If you are interested on the exact formula that I used, see the photograph below.

NOTE: The number of years is the same from our computed number of years, where; Age of Planned retirement – Current Age

Furthermore, to come up up with our monthly amount of money that we need to invest. Just divide The answer we get from our “Amount of Money to Invest Yearly” by 12.

Below is the complete profile of the spreadsheet calculation that we did in this blog and the 1st blog.

Based on our scenario and the inputs we entered in our calculation, Apple would need to invest 9,369.64 PHP per month consistently on a low cost index fund that could give her a long-term 7% yearly return over a span of 40 years, which is from now until she reaches 70-years-old.

A CRUCIAL NOTE!!! Apple’s success with her retirement calculation plan will be dependent on these assumptions, which we used as inputs into the green cells of the spread sheet calculator.

1.) Her lifestyle expenses will be approximately in the same range even until she reaches 70 years of age.

2.) Inflation rate will be at around 2.5% – 3% total average for her 40 years wealth accumulation time horizon.

3.) She will stay consistent with her 4% withdrawal rate on her retirement savings pot, once she starts her retirement life until she pass away.

4.) That her total portfolio investments will have a Compounded Annual Growth Rate (CAGR) of 7% for in her 40 years investment time horizon.

5.) Apple will stay consistent, disciplined and true to her retirement goals, while enjoying and maximizing her present life.

To Sum It Up

To my readers. I really enjoyed making this blog, because I know that this will be helpful to you and other people as well. That it will give you a specific amount of number to aim for your retirement savings pot. I am happy to share to you my very simple excel spreadsheet which I’ve linked at the start of this blog.

PS: I suggest for you to do 3 sample scenarios, the Worst, Good and Best, This is in order for you to have an overview what you can expect from the worst case, and it’ll also give flexibility in your journey to reach your financial savings pot goal. Unexpected events will always happen in the future, and stressing on things we certainly cannot predict and control, is a waste of time and energy, that’s why preparing for it instead will always be a very wise move. Doing it by different scenarios are the start into learning risk management, not just in investment but in our life in general.

I do hope that you’ll be able to use it well and also aid you into your journey to financial freedom and independence. Happy spending, saving and investing everyone. More power to you guys!!

Knowledge is my Sword and Patience is my Shield,

elmads

<— Part 1 – The Inflation Adjusted Retirement Calculator

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.