Read this post today, and I was pretty skeptical. Any time you don’t consider tax consequences pings my radar pretty good. Anyway, I wrote Jim (the author of the blog) an email that I’ll reprint here. All in all, I like his blog; I’ve got it on RSS and read it all the time. I just didn’t agree with this particular post of his.
Hi, Jim,
I’m a reader of your blog, and was curious about your post today, stating that you could save $700/month and retire in 40 years, withdrawing $5000 in 2007 dollars. No offense, but I was immediately skeptical when your first assumption was no tax liability. I think your assumption of 3% inflation rate is low, as this is pretty close to CPI, which exempts food and housing (unfortunately, real people can’t exempt those things). And, just to make things smooth, I assumed an 8% return on investments for the entirety of the scenario. This also assumes that the entire amount saved for the year is placed in the account on the first of the year, to capture the full compounding.
I’m attaching an .xls workbook which shows two scenarios: the first assuming the funds are invested in a taxable account (such as a standard 401k, IRA, or just a normal brokerage account), and the second shows a tax-advantaged saving plan (such as Roth IRAs or a Roth 401k). These Roth vehicles currently have contribution limits ($15,500 for the 401k, and $4,000 for the IRA, for a total of $19.5k a year contribution limit).
As you can see, for the Roth vehicles, you’ll need to save close to $17,750 a year, and that assumes that you deplete your nest egg down to near 0 at the end of the 25 year window. I’m assuming that with advances in medicine and science, one could probably expect to live beyond age 85 (assuming this is the 65th year of the scenario) by the year 2072, and you may want to ensure more length to your balance. A bigger balance will require more savings, obviously. With the fully taxable withdrawls seen in a regular 401k or the like, you’re looking at closer to $2,000 a month contributions; again, depleting your nest egg to 0.
I think you underestimated the amount necessary to withdraw, as inflation will continue throughout the scenario, not just ending at the 40th year.
Anyway, take this for what it’s worth. I didn’t want to post a comment, as I wanted you to have a chance to take a look at my calculations; it’s quite possible that I goofed something up. Enjoy your blog; wouldn’t be a repeat reader if I didn’t.
Hope you have a good day, and I’ll look forward to hearing your thoughts.
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Regards,
So, anyway, there you go. You can see the file I put together for Jim here, if you want to look at it. The moral of the story here is: be serious about your retirement savings. You’re gonna need a lot of it.
