How Much Do I Need to Retire?

Joseph R. Stadelnikas, M.D., M.B.A.

You are A new 22 yo college graduate. You read about options and want
to build a retirement account. You ask people how much do you need?

Let’s start with some assumptions to get us to the right place, give us a
ball park figure. We will assume this account is tax-deferred and
inflation is disregarded and you don’t plan on drawing down your
principal. Once you learn a process, you can adjust for those factors.

After you take to account what your financial needs during your
accumulation phase and withdrawal phase, how much will you need to
make per year in withdrawal phase and how much will you need to earn
during accumulation phase?

You decided you will need $100,000 / year, ($8,333 a month).

You have to determine what realistic % AR is necessary during your

accumulation phase. And, recommended, reducing the % AR goal,
reducing risk and volatility, during your withdrawal phase. You have to
plan on an emergency fund, 2 years is good, we decide 1 year is
acceptable. So simple math, how much would you need to accumulate?
Working through the process………..

I know most have unrealistic expectations of returns. I will be realistic.

You can calculate what is required using any number you desire. What I
would like to show to a new trader or older trader, a simple, logical
PROCESS that works. Start with the question what return can I expect?
Let’s look at the historical returns of the market, ie. S&P500, using SPY.
Using 2 different sources, over 20 years, through bull and bear markets
and numerous corrections, 8% AR is realistic, SPY 20 yr return. During
the accumulation phase of your portfolio, being younger, taking more
risks and trading options, I believe a return +/- 3% or 4% greater than
the market is reasonable to expect. That would be 12% AR (8% + 4%)
during accumulation phase, now one needs to decide what your risk
profile will be at retirement. What do I mean? You don’t want to take
the same risks, trade less risky underlying’s etc. We need to decide what
% AR you will be targeting. For this example I will use half of % AR of
12% during the accumulation phase, 6% AR. It is a lifetime strategy, if
goals change, risk profile changes, feel free to adjust your plan. I have
always traded conservatively, started with small amount of capital and
had a plan and defined goals and I did retire.

Data SPY Historical Returns

If you chose $100,000 a year as your goal and % AR of 6% in
retirement, how much must you accumulate to reach your goal?

Calculations below.

You can see it is a PROCESS.

With above number calculated, $1,666,667. What do you do now?

During accumulation phase, how much capital are you beginning with,
what % AR (CAGR) will you expect, how much will you be adding
yearly and how many years are expected to retirement. You again are
the decider.
You are 22 yo
1% dividend and 12% AR expected, total 13% AR
Starting capital is $10,000
You plan is to retire in 30 yrs at age 52

Using those parameters you will only have about $400,000, rounding,
far short of your $1,700,000 goal, rounding, calculated above. So what
to do? Trade with more risks? A better way to calculate $ / year
(monthly savings) it would take to reach the goal of $1,700,000. Let’s
use that approach. I simply use the goal seek function in excel to
calculate the amount. Goal seek the FV (future value) to be $1,666,667
by changed the yearly PMT, payments added per year to reach that
amount.

You can see, adding $4,350 per year ($363 per month) contribution to
your portfolio must be added.

That is a fairly large amount, especially in early phase of accumulation

for a person with perhaps a family, children, education, etc. obligations.
So maybe recalculate your goal of retirement, delaying retirement to 35
yrs, age 57 not 52. How would that change the amount needed to
contribute? You can change the % AR, etc. Let’s just change years to
retire.
That changes contribution required from $363 / mo to $144 / mo., more
reasonable amount. Delaying retirement to 62 yo would reduce it
further, to only $28 / mo.

This shows you a process. You are the decider, I focused on being
realistic not disappointed in my planning. As you can see, there are
many things you can vary to achieve your goal, but a plan is necessary.
Your initial capital, expected returns (during accumulation & withdrawal
phases), just a few.

QED