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It goes without saying that an incredibly important aspect of saving for retirement is figuring out how much you’ll need. The problem here is that it’s tough to accurately predict how much you’ll need when there’s no good way of predicting how long you’ll live. Thus, it’s probably best to err on the side of caution, and to over-prepare for retirement. But here again we run into a similar quandary… How can we over-prepare if we don’t have a good idea of what it takes to be properly prepared. Hmmm… Let’s start by figuring out how long we can expect to live…
Our first stop is the University of Pennsylvania’s Life Expectancy Calculator. Go ahead and run down the list and answer everything to the best of your abilities — don’t worry, I’ll wait… Next hit the ‘Calculate Life Expectancy’ button and… Voila! You’ll receive an estimate of how long you’re expected to live. Interestingly, this calculator not only gives you a point estimate of your life expectancy, but it also provides an idea of the precision of this estimate in the form of upper and lower quartile values. In my case, I have a life expectancy of 84.38 years with a lower quartile value of 77.12 years and an upper quartile of 94.48. (Of course, I might also drop dead tomorrow. Or maybe I’ll beat the odds and live to 100.)
Now that we have a rough life expectancy to work with, lets head on over to the Retirement Planner from Dinkytown.net. This is a cool little tool that lets you specify a variety of parameters, including current age, existing retirement assets, income, expected rate of income increase, retirement savings rate (go ahead and include your company match), expected investment performance (both before and after retirement), expected inflation rate, and the percent of your income that you wish to receive in retirement. They even let you include/exclude Social Security when running these calculations.
When I plugged in my particulars (age, income, existing assets, and percent savings), but otherwise left the default values in place, I found out that I won’t run out of money until age 100. And that was without Social Security. Adding in Social Security sends my retirement savings off the chart (there’s a minor inflection at retirement, but otherwise it just keeps on growing).
But who wants to work until full retirement age? Not me. So what happens if I reduce the retirement age by just three years? Wow. It has a huge effect. If I retire at age 62, I’ll run out of money at age 85 (that number increases to 97 with Social Security). Time to get cracking on those retirement contributions!
Obviously, these sorts of calculations are only as good as the assumptions upon which they’re based. In other words, you shouldn’t take anything like this as gospel — but it can be an informative exercise.
So… What’s your life expectancy?
And… Will your retirement savings plan be sufficient?