A Plan for Late Bloomers - $10,000/mth in Retirement

In my last post we determined that I would need at least $115,930.25 per year or $9,661 per month in retirement to fund the lifestyle that I want. Does this seem daunting to you? Good! Now lets make it harder. Let's round these numbers up to $10,000/mth and start the plan at age 40 with $0 invested for retirement. The $10,000/mth isn't that bad but starting at 40 is ridiculously late to try to get $10,000 in passive income each month.

Here is one solution:

1. The first step that is necessary is to consider moving your "independence day" into the future a bit more. In the last post I mentioned that people will work in their 70's and 80's regularly in the future so we need to consider this.

• New "independence day" = Age 65. This means we still have 25 years to reach our goal.

2. Working 10 years longer means two things - One, our $10,000/mth needs to be adjusted upward because of inflation and two, you will almost have reached Social Security age. While inflation will always be there social security may not so lets be conservative again and just adjust our needs for inflation without counting on SS.

• If we originally needed $10,000/mth at age 55 we need to add in 10 years of inflation to get us to age 65. Remember the formula - 10,000 x 1.04^(10) = ~$14,000 /mth.

3. Now lets use some basic investment numbers and see where we end up. Essentially we want to figure out how much we need to save for each of the next 25 years in order to get $14,000 / mth. In order to get $14,000/mth or $168,000 / year we would need between 12 and 14 times that amount in investment income - about $2.2 million . Can we do it? Let's see.

4. There is a straight algebraic formula that we could use to figure out how much to invest but I like playing around on financial calculators better. The historic return for the U.S. stock market is 10-12%. Let's start with the conservative 10% return and plug in our 25 year goal. We also need to pick a starting point for how much to save - let's pick $10,000 per year to start.

5. Using the compound interest calculator at moneychimp.com use following numbers:

Inputs

Current Principal: $

Annual Addition: $

Years to grow:

Interest Rate: %

Compound interest time(s) annually

Results

Our result is a whopping $1.2 million dollars. Now this isn't the $2.2 million we were looking for but it is pretty good considering we started at age 40 with nothing.

6. If you play with the numbers on moneychimp.com a little bit you will see that there are several adjustment you can make to get to $2.2 million.

1. Raise your annual investment to $20,000
2. Increase your retirement date to 32 years
3. Increase your rate of return to 14%
4. Any moderation and combination of the above.

Now there are of course lots of drawbacks to taking $20,000/year out of your spendable income but you can always decide to work longer and accept a lower standard of living.

• Investing $10,000/year starting at 40 got us a $1.2 million nest egg that could produce $120,000 but that may not be that bad - worth about $35,000/yr in todays money.
• Invest $10,000/year for 30 years and you can earn $1.9 million or $190,000/year or $58, 580 in today's money.

Last but not least - If you are still reeling from trying to figure out how to find $10,000 to invest each year, consider this: $10,000 today is only worth about $5,000 15 years from now. So halfway to your financial freedom target date you will be investing half what you are investing today due to inflation.

There is a lot of information to digest here but feel free to comment and I will respond. The next natural topic would be to figure our WHERE to invest your money so that you can earn 10% per year.