Saving for retirement. Sounds fairly simple, right? Earn a bunch of money. Stick it in accounts earmarked “Retirement” and you’re done! Actually, this isn’t far from the truth. It really is simple. Let’s see how.

Working Your Way Backwards

In the previous post on this series, we learned how to figure out how much you need for retirement. Once you know your “Number”, you work your way backwards from there.

For purposes of discussion, we used $120,000 a year of retirement expenses- which, at a 4% withdrawal rate, translates to $3 Million nest egg that you need to accumulate.

How do we figure how much you need to save as you go along to get there?

Factoring In Inflation

If you recall, we did not account for inflation when we came up with the $3 Million figure. Which means, that’s $3 Million in 2020 dollars. 20 years down the line, when you expect to retire, that amount will not buy us you much. If you want the purchasing power of $3 Million 2020 dollars, you will need $4.9-$5.4 Million 2040 dollars.

I used this Inflation Calculator at SmartAsset.com, using 2.5-3% projected inflation rate. No one knows what the real inflation will be in the next few decades- but this is the average it has been in the last 30 years (2.5%) and 100 years (3%).

This is one way to go about it- to consider saving up the inflation-adjusted amount you will need.

Another way is to account for inflation when calculating your investment returns. That is, using real returns instead of nominal returns. If you do this, you do not need to adjust your nest egg number for inflation.

Nominal vs Real Returns

If your investment makes $10 on $100, that’s a 10% Nominal return.

If at the same time, inflation was 3%, your Real return will be (10-3) or 7%. In other words, your purchasing power went down with inflation- hence the $10 of return was worth only $7 at the end of it.

Nerd Alert: This is actually a shortcut. The real mathematical formula is:

Real Rate of Return = [(1+ Nominal Rate)/(1+ Inflation Rate)] – 1

Fortunately, the shortcut works pretty well that you do not have to bother with the formula.

Annual Savings Rate

So, you need to have $3 Million in your retirement accounts in 20 years. Since we have not adjusted this number for inflation, you need to use real, not nominal, rate of returns to get there.

If you are starting at zero today, let’s see how much you need to save annually.

Our assumptions:

Google sheet with assumptions entered
Enter your assumptions

With these assumptions, we solve for now much we need to save annually.

For this, we will use the Payment (PMT) function on Google sheets. MicroSoft Excel can do the same thing. I’m not the spreadsheet type and was scared of this for years. But it really isn’t scary. If I can do it, you certainly can.

Google sheet solving for PMT
Solve for PMT: Annual Savings needed to get to our goal retirement value

Start with =PMT and hit enter. Hitting the pop-up takes you to the formula help. If it does not automatically show up, try clicking on the (?) “Turn on formula help”.

Google sheet turn on formula help
Turn on Formula Help

This is how the formula helps looks:

Google sheet with PMT formula help
PMT Function formula help

Now just follow instructions.

To enter each value, just click on the respective cell followed by a comma.

Put in each assumption into the formula

When you have entered all your assumptions, close the bracket.

All assumptions entered in formula in the right order

And hit enter.

Future Value solved

This tells us that if you are starting with nada, and want to get to $3 Million in 20 years, with your investments growing at 4% real a year, you will need to plow in a little over $100,000 a year to get there.

Of course, garbage in, garbage out. All results are only as good as our assumptions. Feel free to modify them if you like. If 4% is too pessimistic for you, go up to 5 or 6%.

Once you have this down, play with the calculator as much as you like. Warning, it can a little bit addictive.

What if you think you can make 5% real returns from the market? Well, you need to save ten grand less a year.

Google sheet showing PMT function with 5% rate of return
Annual savings needed with 5% real rate of returns

What if you want to exit at 15 years instead of 20? How much more would you have to save annually?

Google sheet with 15 yr time period, PMT
Ramp up your annual savings to $150,000 a year and you could be out in 15 years

About 1.5 times more. FIRE, here we come!

What happens if you don’t stop at 15 years, but keep going for 20? This uses the Future Value (FV) function of the spreadsheet.

Future Value function in Google sheet
Future Value function in Google sheet

Solving for it…. you accumulate $4.5 Million.

Google sheet solving for Future Value
Solving for Future Value tells you how much your savings may grow to, under these assumptions

What if you are not quite at the beginning but have $250,000 already saved up? You will get to goal by saving about $82,000 a year.

[Remember to use a minus sign before your Present Value.]

Google sheet with present value -250,000
Starting out with a positive balance helps our cause

But what if you can only save $50,000 a year? Maybe you have student loans or other high-interest debt. Or not a high-enough income to shovel away a hundred grand a year. Then it will take you a decade longer. 11 years to be exact.

This uses the NPER (number of periods) function in spreadsheet. Works exactly the same way as the PMT function. Just remember to put a minus sign in front of your annual savings (payment) argument.

Google sheet solving for NPER function
At $50,000 a year, it takes 31 years to get there

Is The 20% Rule Good Enough?

Saving 20% of your gross income towards retirement is a popularly quoted rule of thumb. It is a good place to start before you’ve figured out where life is taking you. But the sooner you can fine-tune it, based on your goals, the better off you’ll be.

This is because every’s situation is so different. Some variables that come to mind:

For these and other reasons, I prefer the “Work Your Way Backwards” method. Set your goal. Then you know what you have to do to get there. If this is written down neatly on a piece of paper, it becomes the beginning of your Investor Policy Statement.

Please remember, though, these are estimates. you will need to reassess how things have been doing and recalibrate as required.

Where do You Save for Retirement?

Wherever you can. But there is some method to the madness.

This brings us to a total of $32,600 for an employed single doc or $38,600 for a married couple. So, you may have some more savings to put in towards retirement.

These can go into a regular, taxable, Brokerage account. Pick your favorite custodian- Vanguard, Fidelity, TD Ameritrade, Schwab, or other- and set one up.

Automatic periodic withdrawals really work. If you don’t see the money coming in, you don’t miss it either. Plus the cash is not sitting around, waiting for you to invest it. You should be able to set it up for all the above accounts.

Make sure to name your beneficiaries on the accounts when you set them up, too.

Next up, what do you invest in? That is your Asset Allocation. We will need to talk about that in another post, since this one is now long enough. Or too long, depends who you ask.

Questions or comments? I’d love to hear from you. Thank you for reading!

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