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Modesty

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June 13, 2008 – Comments (2)

In my last blog post I proposed that if you are eighteen and starting out today, with a salary of $24,000 and are willing to live very frugally (probably more frugally than actually possible) and manage to save $250 each month and earn 8% interest at the end of 42 years you can retire at 60 with a million dollars. After dividing that mil into 20 equal parts you get to retire on $50,000 per year. Annual inflation of 4% will have raised 2007's poverty level of $10,400 income to $54,000 in 2050.

So the question becomes how much do you need to save to live modestly for twenty years in retirement.

To live modestly today, you have a small apartment with utilities at $850/month, auto liability insurance at $200, health insurance at $400, phone/cable/internet combo at $100, car maintenance at $75, food, clothes at $75, gas at $200, one vacation annually at $100, a next car savings account of $100, a friday night date twice a month at $100 (she loves you for who you are), and $100/ month for the stuff that comes as a surprise.

Total: $2200/month, times twelve months equals 26,400 times taxes of 20% means retirement income of $31,680/year. Today.

Assume 4% inflation for 42 years you need retirement income of $158,180 /year the first year going up after twenty retirement years to $346,592. So in order to retire, and live the inflation adjusted lifestyle I described above you will need to save 5,056,894. Or $1250/month, every month, earning 8%, starting your first day of work at eighteen years old.

So in order to live modestly today and save enough to retire modestly at 60 years old you need to cover those modest expenses, $2200 plus retirement funding of $1250 equals $41,400 annually after taxes and $49,680 before taxes of 20%. And that is your first year at eighteen years old. You still need enough raises to keep up with inflation so you can stay in the race.

Of course if you want to take some pressure off, you could start saving $375/month at 8% and work until you are 70 and retire modestly for ten years with 3 million. Your starting salary at eighteen would need to be $37,080 before taxes of 20%.

2006 average starting salarys.

$56,269 Chemical Engineering $53,096 ComputerEngineering $53,500 Electrical Engineering $50,744 Computer Science $51,808 Mechanical Engineering $47,182 Information Science $45,391 Management Information Systems $44,928 Accounting $41,115

Business Administration $37,191 Marketing $32,870 Liberal Arts $30,369 Psychology

2 Comments – Post Your Own

#1) On June 13, 2008 at 1:21 AM, abitare (34.16) wrote:

Considering the S&P is net 0% return in the last 10 years (ref WSJ Lost decade for Stocks), minus 20% inlfation, a 8% returm per year is pretty extreme.

Lost Decade for Stocks?

 

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#2) On June 13, 2008 at 8:50 AM, devoish (98.36) wrote:

Abiteracatania,

I have also skewed the Cost of living numbers upward. Cost of living has averaged an increase of 3.42% anually since 1914. For the last twenty years it has been under 3% so I used 4%, arbitrarily deciding that it would return to average. I was surprised no one challenged that assumption. I was going to defend it with the "return to average" idea, made worse by the last decade of Congressional fiscal restraint.

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