Current value of a string of payments

[Trooperdan]

I guess we've all seen the retirement advice sites that tell us we need over a million bucks to retire... only lately I've seen at least one site that says a million ain't enough!
I'm nearing retirement, have a government 401K type plan, (TSP) and will have social security, military pension and civil service pension coming in.
My question is: what is the current value of a pension? For example, let's assume I get military retirement of 1,700 monthly. How much cash in the bank would that be the equivalent of?

Thanks to any financial wizards that know the answer!

 

[ladder13]

Assuming a conservative 5% rate of return, that pension is worth +- $400,000 cash. IOW, you would need 400G's to generate $20,000 per year at 5%.

IE $1700 X 12 = $20,400 per year
$400,000 X .05 = $20,000 per year

PS....I'm NOT a financial wiz, just doing some basic math

 

[rburg]

I think the term you're seeking is "Present Value". And its become so difficult to calculate as to make it meaningless right now. With interest rates down in the 1.5% range (what I'm able to get right now), its not a nice number to calculate. Worse, real inflation has heated up a bit, clearly well above the number I quoted. But your expectation is much higher as you get out a few years.

In the context you're looking at (and I am too), I think you probably need to consider one of the adult education courses offered in the evenings. I've taken one already (about 5 or so years ago.) Yes, they enjoy telling you you'll need $1.3 million to survive. The guy who taught our course wanted the money given to him to invest. I can't remember his name, but I don't think it was Madoff.

What most retirees discover, or seem to is that once the big bucks stop rolling in, you become much more conservative (if you ever were not.) You need to study your finances as they are now. When I did that, I discovered we're saving about half of our net income/disposable income. Worse, we end up getting about 1/3rd of our gross "withheld". It means we're only really living on 1/6th of our income. And in the future, we won't need to save the other half, and our taxation should take a similar nose dive.

Probably as important as how much we'll need total is getting our current finances in order. Getting anything we can paid off to lower our cash flow needs. You can view your finances from different perspectives. The one you're asking about here is the total you'll need. But just as important is a cash flow perspective. I can see my problem being that to get cash I'll out of necessity be incurring taxable income.

What I'm seeing is the intelligent retiree has a side job figuring out where his cash will come from to meet obligations. Part of the trick or the biggest part is to avoid incurring income and then paying taxes on it. You take your money from the source that yields the lowest overall cost to you - both short and long term.

The "what not to do scenario." I have a buddy who was forced into a buyout situation. He worked for the local Bell company. One day, out of the blue, he was called into an conference room. He was told he could have it any way he wanted, but the best he could do was walk out of the meeting jobless, with a check for $275,000 as his going away present.

More to follow....

 

[The Highlander]

Go see a reputable Financial Advisor. I really recommend an Edward Jones Investments advisor, just find one in your area. They have some great software that can help illuminate "present value" and other concepts. And great investments to help you get there.

Disclaimer: I'm a retired Edward Jones Financial Advisor.

The Highlander

 

[rburg]

Continuing from above.

So the buddy took his money (actually they dumped it into an IRA) and was unemployed but happy. Then a couple of years later he got a wild hair and decided he wanted a new pickup truck. At the time, the one he lusted after was going for $35,000. So he went to the custodian, a local bank, and said he wanted $35,000 out. But because he wasn't 59.5 at the time, he had to suffer the 20% penalty. When it was all said and done, his yearning cost him about $45,000. Just an example of what not to do and how not to do it.

When you decide you need a financial advisor, interview more than one. It gets boring talking to them, but it also isn't the best idea to go with the most personable one. Its an industry known for its con-men (I offer up Bernie Madoff as an example.)

 

[feralmerril]

Dave Ramsey says when your ira or 401K is big enough to let you live on 8% a year, that is what you need to retire. So in other words, figure how much a month you need to live on. Then add up your retirements and see how short you are. Will 8% of your 401K a year cover the differance? He uses 8% because over time he claims your investments should be averageing 12% historicly over the long term.
I think his theory is a fair starting point.
I once read think of your retirement as a 3 legged milk stool. One leg is your retirement income, secound leg is your social security, and the thrid leg, your ira or 401K etc.

 

[oldRoger]

As rburg says the Pv formula is totally dependent upon the input of an assumed interest rate. A financial advisor's guess about expected interest rate at this point is no better than my wild guess. The advisor has to talk about history and use a historical average.
If we take Dick's 1.5% interest with out getting into details it would require $1.333 million to get a before tax $20,000.
The advisor will also assume a draw down, that is use of some of your principal each year together with the interest, a declining balance problem. The assumption is that you will run out of money exactly the day you are called to your maker. Obviously this is a difficult number to know.
The new health care bill has some taxes on investment income which are going to upset all of the previous wisdom for these estimates.
On top of the rest of the problems inherent in the calculation, we also have many government pension plans which are not funded and may not be able to pay their "guarantee". My wife's Illinois Teachers Pension is one that is very shaky.

 

[oldRoger]

The problem with the 8% number is not that it is historically wrong; it is that during those years when the market was returning 8-10% we usually had strong inflation. So....... we get our $20k from a $250,000 +/- investment but the dollar drops in value to $.85 during the period hence we need more than $20K to maintain our standard of living.
So done properly we have to assume an interest rate and an inflation rate.
Further we still have to cope with those years when interest rates fall and our income goes with it.

 

[max]

I used this site prior to my retirement. There are many different calculations and formula available. http://www.dinkytown.net/java/DistribSavings.html

 

[FrankD45]

I will second the advice that you seek out a good financial adviser. I can also add to the recommendation that you consider Edward Jones for that role. I retired December 31 of 2007 and rolled my 401K into an Edward Jones retirement account. I don't have to remind you that my 401k became a 201k in very short order. I was fortunate in that I could ride out the down market and live on Social Security and two employer funded pensions. The investments I made with Jones were sound and my fund is now back and the plan is to use the income on my retirement plan to cover inflation.

Back to your original question, use 5% as suggested earlier to calculate how much you will need in a retirement fund. While 5% may be aggressive today, over time it is a good number for planning. Simply add up your estimated cash needs and divide by .05 to get the principal amount needed for retirement. When you think in terms of needing a million dollars, don't forget to include your estimated Social Security benefit and other pensions in the calculation. A Social Security benefit of $1,000 is roughly the equivalent of $250,000 in your fund.

I hope that helps,

Frank

 

[Old 44 Guy]

I'm no financial wizard like some I know. So when I received my inheritance I went to my bank & they set me up with their financial advisor. They recomemned Franklin Templeton Tax Free Govt. bonds. Been 8 years now & they are doing well.

 

[H Richard]

Be sure to put in the mix that you should have NO DEBT when you retire, No house payment, no car payment, no credit card payments. Only monthly expenses are the current utilities, groceries, RE Tax set aside, and other routine monthly expenses. Don't charge anything you can't pay in full when the bill comes. Then you can sit back and enjoy.

 

[oldogy]

Good advice. I've been retired since 1994. Had no debt, a decent retirement, decent qualified amount and real estate. Retirement was offered as an early buyout. Just so happened I had planned to retire the next year anyway.
Take classes.
Read all you can on money management.
Find a financial advisor........Beware of one who wants to invest your monies his way..........Ask lots of questions if you do not understand.......Do nothing he recommends immediately.
Fidelity has a good number plug in software package.
Good luck.
oldogy

 

[woftrax]

Trooperdan..

The first and primary decision that you will have to make is how much risk you are willing to take in investing your capital..and then stick with that decision wherever it takes you..sleeping level is important when you get old..I know and I went low risk insured..The brokers will not advise that..It's not their money..

 

[Farmer17]

Make sure you keep your spouse happy, loosing half or two thirds of your wealth in a divorce will really put a damper on retirement plans. Don't ask me how I know.

 

[hiredhand]

I have been retired over 7 years and have yet to collect Social Security (not old enough). I am living very well and have managed to maintain a constant draw that has not changed in these years. I do have some real world experience here.
First, I agree with the advice to go see a financial advisor. But find one you feel secure with. Interview several before deciding on just one. And if one of them tells you that they can get you more than 6% a year with no problem, RUN! You might get more but that is not a given.
Now, to the meat.
Figure a 6% return on your money right now. DO NOT put all your money into stocks. Diversify!!!! And most importantly, do not draw the full 6% return. Remember that inflation continues after you retire. So you want to grow your nest egg. Put at least two percent back into the nest egg for growth.
Most planners are going to suggest that you have enough saving that will return 80% of your best year's income. This is great if you can do it but really not necessary. Say you are making 100,000 dollars a year. But after taxes, social security, savings, etc, you only get home with $65,000. This is the amount you are really living on. So you have already reduced the amount of saving you need to have. Next, your taxable income drops because your income drops. No social security to pay. More savings. And, not working saves meals out, wear and tear on cars, reduced need for work clothes, etc, More savings.
And, if you have your home paid off, cars paid off, charge cards paid off, and are basically your own person, you will live very well.
The key to retirement is that you MUST be a responsible adult when it comes to your savings. DO NOT pull out cash for a new boat, or car, or vacation. Save for these things and then pay cash. And most important, do not use any of your savings to help out the kids, relatives or friends. You are no longer working and cannot replace the money you give away.
Finally, draw social security as early as you can. Most calculations show that it take from 10 to 12 years to make up the difference in the amount of money you get from uncle Sam if you wait until 65 to draw (this assumes that you can retire before 65).
Bottom line, it takes less money to live well than most people realize.
And by the way, I still buy guns, travel, eat out, and basically enjoy life on the money I am drawing.
Go talk to the financial planner but do your own math also.

 

[bk43]

Morningstar has some great tools to help in this area or for investing in general. Many employers offer their premium services to employees and retirees. It's worth checking out.

Bob

 

[stiab]

I think the term you're seeking is "Present Value". And its become so difficult to calculate....

The number you seek is usually expressed as P/A, or present value of an annuity. Here is the forumula: (((one plus the interest rate) to the power of N), minus one), divided by (the interest rate) times ((one plus the interest rate) to the power of N). Where N equals 20,400 in your case.

Your retirement income will be $1700 monthly. There need to be two assumptions, one for the interest rate and one for the number of years you would receive the annuity (pension). If we assume 15 years and 5%, then the present value is $211,745.88. Change that to 20 years and the answer is $254,228.88. Change the interest rate to 6% and 20 years of being a pensioner and the present value becomes $233,985.96.

Hope this helps some...

 

[Vulcan Bob]

Be sure to put in the mix that you should have NO DEBT when you retire, No house payment, no car payment, no credit card payments. Only monthly expenses are the current utilities, groceries, RE Tax set aside, and other routine monthly expenses. Don't charge anything you can't pay in full when the bill comes. Then you can sit back and enjoy.

Now that is good advice. I retired two years ago with a modest monthly income and a modest rollover to a retirement account. Not oweing anything but utilities and taxs has been a great help. I will not buy anything again if I cannot pay cash for it.