Using the calculator, estimate a $500/month contribution from the age you will begin working/career until 60 (59.5 is the earliest you can take out without penalty)
Start with a $0 amount
Estimate 9% interest (conservative amount based on IRA indexes)
Use a variance of 2% (fluctuation in the market)
Select Annually (Compounding)
While your account is continually growing and contracting, we are looking at the overall growth at years end
$500/month investment over 38 years (22 to 60 years of age)
Total contribution of $228,000 (38 years x $500 x 12 months)
Total value at 60 is $1,695,778.70
Given that interest may fluctuate from year to year, it is still safe to assume that you would have close to $1M by the time you can begin taking out monies
How much do you spend?
What do you spend each month on expenses?
Did you pay off your Mortgage and loans?
By the time you decide to retire, it is likely to assume that you have already paid off the largest debts in life
e.g. home, college loans, car
Essentially the 50% that you NEEDED all this time has been significantly reduced.
e.g. If you had a $2,500/monthly mortgage, you will now be saving $2,500/monthly or $30,000/year.
If you bought a house at the age of 28 your home would be paid off by 58 at the latest (we can show you how to pay off your mortgage 5-10 years earlier)
That means you will save $30k for the next two years until you retire ($60k).
If you paid off your home in 20 years (48)
You would have an extra 10 years of saving or a total of $360,000 ($30,000 x 12 year)
You cab decide to invest or save (real estate, stock market, or other investment to make you more money)
How you want to live, travel, eat, donate, or support others?
Got a bucket list?
Do you have a pension?
If you worked for the state, federal government, or a company that has a pension plan, you will receive money from them once you retire offsetting the amount of money you will need.
For example, if your pension will be providing you $30,000/year ($2,500/month), then you would need less from your IRA's to support your monthly spending habits.
Three ways to think about distributions
Your distributions will primarily rely on whether or not you need the money
You might have a pension and not need as much money
You may want to invest your money in other areas
You want to have monies after your death to give to your family
You want to give money to family members and charities now (when they need it)
Most financial advisors talk about distributions of 4% annually
$1M x 4% = $40,000/year
Since interest typically grows at a higher rate (9%), that money will grow back over the course of a year and then some
Distributions equal to last years growth
If last year provided us with a 9% return, we can take out 9% a year ($1M x 9% = $90,000/year) and not lose anything from our IRA base
The idea is to make your money last until you die
Total amount divided by the number of years until you die
If you think you will live 40 more years after retiring at 60, then you will need your annual expenses x 40 years
e.g. $3,000/month x 12 months x 40 years = $1,440,000, $45,000/year x 40 years = $1,800,000
See below
How long do you plan or think you will live?
Estimating your life expectancy can help you determine what you will need
If your parents/grandparents have lived until their 90's, I would expect that you will do the same or longer with modern medicine and technology
So if you retire at age 60 and think you may live to 100, you will need to account for 40 years of expenses plus inflation (rising costs). This can also be offset by pensions and other retirement plans.
The simplest calculation is to take 40 years and multiple it by your annual spending ($40,000/year x 40 years = $1.6M)
Think about it 1:
How old did your parent(s)/grandparents live until? or How long do you think you will live until?
How to start thinking about your money in the end
You are able to gift $16,000/year (based on 2022) TAX FREE
Lifetime Gift Tax Exemption is $12,060,000 (based on 2022)
This means you can gift more than the $16,000/year to family members while you are still alive without taxation
Think about it 2:
Do you plan to continue investing your money in retirement?
What do you want to do with your wealth at the end of your life?