Quote:
Originally Posted by goodlife36
How do I figure out what I will need for retirement? Let us say my expenses are $2000 per month. How do I figure out what it will be 23.5 years from now? I would appreciate the details of how you arrived at your number. Thank you.
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you can't predict what your expenses will be inflation wise nor do you care much when it comes to future planning unless you are close to retiring and know what current expenses look like .
even then , you will most likely back in to what you have and make it work rather than trying to guess what you think you will have to work with but don't.
heck , when i looked at my portfolio balance in 2000 , after 17 years of almost 14% cagr and guessed at what i would have when i retired the number was mind blowing .
but then the lost decade came and growth slowed to a crawl and if i woke up after 15 years and looked at the balance i would be like what the heck , that is it for 15 years growth ?
what you are really planning around is the hope it won't be any worse for you than it was for the worst retiree groups in history based on markets ,rates, inflation and the order of those gains and losses .
think of it as building a house in a storm area . here in nyc if i was building a home i would build that home to construction standards that could withstand a bit more than hurricane sandy .
that is one of the worst ever .
if it was more expensive to build that home i would have to just build a smaller home .
retirement planning is based on the worst case scenario's to date . those scenario's contain the worst conditions , including the worst inflation .
the group in 1965/1966 that retired saw inflation that was 2.50% -3.50% . who would have guessed in 3 years time it would have doubled and by 1974 it would be 11%. it was crushing to a retiree. but with inflation so low who ever expected a 4x increase coming . on top of that it took markets 27 years to hit new inflation adjusted highs and bonds got crushed . so they got both barrels between the eyes .
so modern retirement theory says if you can use about 35-60% equities , you stand at least a 90% chance of getting through these worst cases we already had drawing 4% inflation adjusted . .
no retiree group has seen anything worse than the 1965/1966 group in 50 years .
so the important factor is your allocation .
once you calculate the income you can draw safely , add in social security and any pension, rental income etc .
then develop a lifestyle around what you do have and can draw . like water our retirement lifestyle will seek its own level around what you have .
just work on growing as much as you can up to retirement .
once you are ready to retire , you can then test your expenses to see if they fit in budget . that is the reverse of what you are trying to do .
so here is how we would utilize this method .
hypothetically you would add up all your non discretionary spending . things like rent ,insurance , utilities ,etc , all the things that you must pay .
lets say it is 30k . what i would do is double that to include all your discretionary spending . things like food ,clothes ,vacations ,gifts ,travel ,etc .
so hypothetically you need about 60k for a safe budget where you actually have room to cut back if markets or unexpected large expenses or emergency's get you as eventually they will .
now we know we want about 60k income so we subtract out social security , pension ,rental income and any other source of income other than your savings .
lets say the income comes to 40k , so we need 20k from your portfolio .
taking 20k and multiplying it by 25x says you need 500k in savings to generate 20k safely providing that 500k is in at least 35-50% equities . if you are avoiding equities you can only draw about 2% inflation adjusted not 4% so now you need 1,000,000 saved to generate the same income .
how you allocate is key .
if you can't get the savings now and allocation to meet your spending needs you need to cut back , you may even need to relocate somewhere cheaper ,whether you want to or not .
so asking how much you need is like asking how long should a rope be ? it has no answer by itself .
you have to put all the pieces of the puzzle together in a good calculator like fidelity or firecalc and see how your portfolio stress tests against the worst case scenario's so far
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The calculators do not make sense to me. 
