The archetypal retirement problem
You will need money when you retire. How do you get an estimate of how much you need and therefore how much you should save? We will do this problem from a US perspective, but you could easily substitute in data from other countries. The timeline looks like this:
Work and save Retire Spend retirement money Die
So that we can all discuss (roughly) the same problem, let’s start with the following data:
- It is January 1, 2021; you turned 30 years old today.
- You are employed at a salary of $100,000.
- You will work until you turn 70; you will stop working on your 70th birthday and retire.
- You will need 25 years of retirement income.
- Let’s agree that you will be paid in arrears. So you will work for a year and then be paid the following January 1. [That means you have already received the $100,000 from the year that just ended.] You will save money from your salary at the time you are paid, starting next year.
- Let’s also agree that you will pay yourself at year end during retirement. So if you retire at age 70, your first retirement payment to yourself would come at age 71 and continue until age 95.
- Let’s ignore Social Security for the moment.
- There is a spreadsheet called “Historical returns on bonds and stocks in US”; it contains data that will be useful.
Your challenge is to figure out how much money you want in retirement and then how much you will need to save each year to get there. There isn’t one right answer to this problem. This is truly an interesting question: only you can determine the appropriate amount for your retirement needs!