How much do you need to save? - ch 6 Bogleheads series at Catch a Gideon

November 7th, 2006 by digerati

Inflation needs to be considered. A million dollars is often said to be a good amount (at least it is constantly used as examples in books). A million dollars in 50 years is likely worth about $100k now. No one can live on that much for 20+ years.

Inheritance - don’t count on it. The inheritance you hope for may not happen for any number of reasons include that your parents live longer than expected, they incur high medical costs, or just decide they plain don’t like the person you married. It’s far better not to use the inheritance in your planning. The Millionaire Next Door perfectly demonstrates what happens when someone expects a large inheritance. Basically it is better to plan on your own and be “surprised” by the additional money you may get.

Other income is important too. You may get a pension, social security, or take up loan sharking on the side. Consider also the gains from selling a house and moving to a smaller one, or an apartment. It is important to realize that you don’t stop earning money when you retire. You will still have some other income (likely) and your investments will continue to gain with compound interest as before. You’ll just be skimming off the top.

So, how much do I need to save?

I’m going to have to do exactly what the book does here and just point you toward the calculators. The best way is to plan out your goals and determine the rates of return etc discussed above. You could also hire a money manager if you cannot determine these for yourself or you want more details. Here’s one of the calculators you should try out. Keep in mind that as you get older your holdings should become more conservative with a lower rate of return.
Have you bought The Bogleheads’ Guide to Investing yet? You should, we’re almost a third through the book!