My birthday is next week. I’m only a couple of years away from 30 now. I’m very much getting to the point where I need to get serious about retirement planning if I don’t want to experience a lifestyle cut later in life.
For the past 5 years I’ve been systematically investing 6% of my income with a 50% employer match each month. My portfolio has performed well with returns averaging around 13% per year over the last 5 years.
I’m optimistic that I can achieve returns in the 12% range but am realistic enough to know that I need to structure my plan as though my actual rate of return will be less.
My main concern after that is if I am contributing enough each month. What amount do I need in my retirement accounts by age 30 to be confident that I will have enough to retire on?
The Nitty Gritty Of The Numbers
I sat down this week and did some analysis. I assumed my portfolio balance would be $45,000 by 30. That’s a pretty conservative estimate based on the current balance and my anticipated contributions over the next 3 years. It essentially assumes no growth for the next 3 years.
The first thing I wanted to see was the effect of different rates of return on my portfolio. For this analysis I assumed that my annual income would remain flat after adjusting for inflation and that my contributions would continue to be 9% of my income from age 30 to age 65.
So what does this chart mean? For one, it shows the powerful effect of compound interest. Just look at the huge difference between a 9% return and a 12% return!
Second, it gives me a good picture of my best case and worst case scenarios at retirement. If my portfolio performs amazingly well I will have close to $5.5 million at age 65. On the other hand, if I just squeak along at 3% I will be only be looking at $500k.
Having these numbers is a good start, but it’s only half the picture.
How Long Will My Savings Last After I Retire?
You can’t determine how much is enough unless you know how much you need to last from retirement to the end of your life.
So I did some more analysis. How long could I live on each of the portfolios above?
For this analysis I assumed that I would have a very conservative portfolio at this point with returns averaging 4% – essentially everything would be in investment-grade bonds, government bonds, CDs and blue chip dividend stocks.
I also assumed that we would take distributions totaling $100k per year. That would allow my wife and me to sustain our lifestyle, cover increase healthcare costs and be able to actually enjoy retirement.
To maintain continuity between the chart above and the chart below, I have carried over the portfolio names. However, in the chart below the annual return is set at 4% for each portfolio.
Well that’s interesting…
The $500k – 3% portfolio would barely last 5 years. The $1 million – 6% portfolio would only last to age 78.
What’s even more interesting is the 9% portfolio, which was at $2.4 million at age 65, almost generates enough cash flow to cover the distributions. The balance only drops $263k over the 30 years.
The 12% portfolio more than doubles during this time period! I could more than double my distributions before it would start eating into the principal balance.
Now How Much Do I Actually Need In My Retirement Account At 30
With all of the above taken into consideration, I tried to put together a base case scenario to see if I am on track for retirement.
Here’s what I came up with:
If I can achieve an 8% return (which I believe is a good median estimate) then I need $40,000 in my retirement account by age 30 to be able to sustain annual distributions of $100k from age 65 to age 95.
Based on this, it looks like I am on track to meet one of my retirement goals!
Want to run this analysis for yourself? Download my spreadsheet here!
Have you recently checked to see if your plan for retirement is on track?