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Common thinking on what you need for retirement in 2015 is $400,000 - $1,000,000 for middle class families. Depending on Social Security and Pension income you may need less. See Retirement.
Inflation 3% (See charts for average inflation)
Savings: - Amount accumulated in portfolio at 7% return. (See charts for average return)
Of course it's not that simple. Savings and income will vary your life style and age. DINKs (Dual-Income, No Kids) will have a different savings pattern than the average family.
The value of compounding
Growth Rate=8.00% *
* Some fiancial planners still use 10% growth. The 25 year averages are down because of the 2008 recession. See chart below. I think 7 or 8% are more conservative number to use for expected growth.
- The net present value of $10,000 today is more than $10,000 10-20 years from now, but with current inflation rates < 3% it wasn't worth trying to compensate for that.
See Retirement for how much you need to retire.
In Stein-DeMuth "Yes, You Can Get A Financial Life!", they list the following saving stages.
Saving to buy a house Expenses to drop
U.K.-based real estate agents and property consultants Strutt & Parker singled out six expenses young couples should drop in order to afford a deposit on a home,
According to Strutt & Parker’s list, Giving up one night out a week could save a couple, $8,000 per year. Eliminating takeout meals could save $3,500 Bringing lunch from home — could tack on an additional $3,400 Forgoing an annual vacation - $900 Lottery tickets - $1,100 annual phone upgrade - $200 Totaling $84,000 over 5 years
How much do you need for retirement:
In Yes, You Can Still Retire Comfortably!, 2006 Ben Stein and Phil DeMuth say,
You'll need 12 to 16 times your final salary to maintain your standard of living. However hey are assuming no social security or pension. (see Social Security funding below)
e.g. if your household income was $80,000 you'd need from $1 - $1.3 million.
The tables from their book are at www.stein-demuth.com.
If you get $35,000 from social security, then you need $540,000- $720,000 in savings.
Consumer Reports says people with between $400,000 and $1 million in savings were just as happy as those with more. See retirement.
In the Stein-DeMuth book (above) they list the saving progress chart below.
You should always be saving the maximum amount from all tax-advantaged, employer-subsidized savings plans, such as Keogh and 401(k)s.
Social Security funding: As a result of changes to Social Security enacted in 1983, (The full retirement age for people born after 1960 was raised to 67) benefits are now expected to be payable in full on a timely basis until 2033. After that, the trust fund will be exhausted and incoming payroll taxes will only bring in enough to pay for 77 percent of scheduled benefits.
There are several ways to fix this so social security is viable for the next 75 years. Lawmakers have proposed raising the full-retirement age, reducing benefits for wealthier retirees (known as means testing) and raising payroll taxes.
Sources: Trustees Report Summary 2014 | SSA.gov
The Social Security (SS) Cost-of-Living Adjustment (COLA) is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). For the last 20 years it has been pretty close to the regular CPI.
See Social Security COLA in Retirement.
While advocates for the elderly argue CPI-W understates the true increase in costs the elderly face, deficit hawks have pushed for linking COLAs to an even lower measure of inflation known as the chained CPI.