First, thanks to everyone who attended the Norman Chamber of Commerce Business Marketplace this evening--lots of fun and a nice opportunity to meet more community members!
Now, let's talk about how financial planners dazzle you with "The Number" you need to retire. "The Number" is the size of the account you need to live in the way you want. It's not magic--it's a financial calculator. Here's how it works.
The calculator has a built-in function that calculates compound interest. It needs to know several things:
1. How many years will you live during retirement (the assumption today is that you will live to between ninety and one hundred years old).
2. How much interest can your money earn during this period of time? This is the rate of return your portfolio grows (often a number between 5-8%).
3. What will inflation run?
4. How much money are you going to need every month to live?
With these numbers, the calculator can help you calculate the total value of all money you will need at the beginning of retirement.
You offset this need with any monthly pension or Social Security you expect to receive.
The next step involves how long you have until you retire:
1. How many more years are you going to work?
2. How much money do you have saved right now?
3. How much money are you going to be able to save every month?
4. What rate of return will your portfolio grow (again, being safer involves assuming between 5% and 8%)?
5. What will inflation run?
The calculators are easily purchased at discount stores. My favorite is the HP 10B II, and there is also a function in Excel that can do it.
I know, I know......you're never going to do this. I don't blame you. Ask your financial advisor to show you the steps involved (in fact, make them calculate it for you).
I just want you to understand the inputs and the assumptions. This way, you understand how "The Number" is calculated.
Be prosperous!
Peggy
No comments:
Post a Comment