A Plan For Someone In His Forties…


So you just turned forty, are married and have about $200,000 saved for retirement. You have a couple kids who will enter college in a span of say five to ten years but don’t have a penny saved for that eventuality. So should you abandon everything and jump on that college savings bandwagon? Or should you tackle retirement first and leave the decision to pay for college when the time comes? To decide on what’s best for you and your family, we’ll run through some scenarios…

You want to retire when you turn 65 and draw about $50,000 in income each year in today’s dollars for the next 35 years in retirement. That’s planning for a lifespan of 100 years. You think that’s a long life but you’ll be surprised. And we don’t like surprises. And the chance of at least one of you (you or your partner) surviving till then is not necessarily that low. So you got to plan for it and we’ll do that here.

This is what that income draw looks like in retirement…


So $101,640 in the first year of retirement is the same as $50,000 today (assumes 3% inflation). $277,670 in your last year on earth (sorry…) is again the same as $50,000 today.

To get there, you need to save and invest $35,941 each year in a globally-diversified portfolio of equity and fixed-income investments (the mix will change as you age). And that’s with no legacy left behind…shown below…net-worth-as-you-draw-income-in-retirement-no-legacy

Now setting aside about $36,000 each year for a goal that far out might be a stretch for most of us but if you are maxing out that 401(k) every year, that takes care of half the required savings rate. Plus employer match will chip into that required savings rate even more.

But look what happens when you wait a few years and then start getting serious about retirement say when you are 45 instead of when you are 40. If your income needs and the year you want to retire remain unchanged, you now have to set aside $52,000 each year ($52,314 to be more precise). A five year delay causes the amount you need to save each year to jump by almost 50%.

Now if you are flush with cash and you intend to leave a legacy behind and you can muster enough resources to set aside say $50,000 each year, that extra $14,000 a year results in you leaving behind a legacy of about $3.4 million. That’s $600,000 in today’s dollars. Not a life changing amount but no small change either. The more you set aside, the more you leave behind. If you want to, of course.


And this does not factor in Social Security income which whatever folks say, will still be there for you in some form or the other. But Social Security by itself does not a good retirement make but this on top of what you draw from your portfolio can do wonders to the quality of life you enjoy during retirement.

So this is a simple yet elegant way to see if you are on track to meet those goals you are saving for. And this could be your custom pension plan barring all the nitty-gritty details with respect to implementation and monitoring of this plan.

Now back to college, if this were you and you were on track for retirement, you can then take your excess savings and pummel them into a college savings plan such as a 529 type account. This is the ONLY tax advantaged way to save for college. Money goes into this account post-tax, it grows tax-free and can be taken out tax-free if used for eligible college expenses. But if your kids are in middle school or approaching high school then it probably is too late to restrict access to this money in a dedicated college savings account as most of that tax-free compounding perk is already diluted. But fret not. You can plan and pay when the time comes because there will be many more ways to get that college education and an equal number of ways to pay for it. But there is only one way to pay for retirement. So retirement comes first and then the other goals.

And all this number crunching assumes 7% portfolio growth rate during your wealth accumulation years and 4% growth rate during retirement years.

Happy planning…

Image credit – Jeff Turner, Flickr