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How Big Will My Retirement Account Need To Be?
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THE SCENARIO
Last time, we looked at how much retirement income I'll need in 25 years. This time, we'll figure out how big my retirement account balance will need to be in order to support that level of draw-down. I'm going to assume that the contribution from Social Security will be negligible, and that I have no pensions or any other source of income to draw upon after retirement - this one account will have to support me entirely.
The question: If I want to retire in 25 years, and
I want to have $20,000 per month in income after I retire, how big does my account balance need to be if I think I'll live for 20 years after I retire? Assume that my account earns 8.5% per year, and is completely empty when I die. Ignore the effects of inflation on my income needs in the post-retirement time frame*.
* Like I mentioned last time, inflation makes things complicated, and is sometimes ignored or fudged when doing look-ahead calculations.
THE SOLUTION
This one is pretty straightforward. The only slightly tricky thing is that I mentioned that I'm going to retire in 25 years, but that's not relevant to the actual question. Every number in the problem statement doesn't have to go into the calculator.
First things first, make sure the calculator is using 12 Payments per Year.
N: 240 (I plan to live for 20 years after I retire)
I/YR: 8.5 (My retirement account will earn 8.5% interest during my retirement years)
PV: (This is what I'm trying to find)
PMT: -20,000 (I'll need to withdraw $20,000 per month to live on after I retire)
FV: 0 (The account should be empty when I die)
In order to support the kind of retirement I want, I'll need my account to be $2,304,616,80 on the day I retire.
What do you think? Does $2.3 million sound like a lot of money? What does your number look like on this question, and how did you come up with it? Let us know in the comments!
