Thursday, April 17, 2008

Goals – How Much, By When, For What 2

The above is a sample of a retirement plan. There are 3 parts to it, for now ignore the last 2 parts:

Part 1 - The amount required per year during retirement to cover expenses
1. Take your current expenses / expected retirement expenses in current value of $ and calculate the pre-tax amount of $ needed.
Pre-tax amount of $ = the amount of gross salary / profits needed before the government gets their cut

2. Take the pre-tax amount of $ needed and calculate the future value of pre-tax amount of $ needed.
"Future value" = factoring in inflation, ie. $1 today can buy much more than $1 in 20 years time.

At the end of Part 1, you'll have the amount needed per year to be covered with your investments' returns during retirement. Scary numbers huh, especially if you're a pessimist / cautiously optimistic person like me - I assume average inflation per year to be 6% because of my lifestyle that uses non-controlled items :(

Please note that I'm planning to leave behind a sum for my child and hopefully, grand-child(ren), to kick-start their own investment plans. Thus, my retirement plan assumes that I live on my investment returns only, even having enough savings to re-invest a %. Due to this, I need a lump sum of $ to generate that amount of investment returns. If I don't intend to leave anything behind, the lump sum amount I'd need would be much less (approximately 80% to 90% less).

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