Using Present Value To Plan For Retirement
Monday, July 3rd, 2006
Recently, we disussed how you could achieve the goal of $1,000,000 to retire on. But, is will it be enough? Now that sounds strange to say that you may not be able to retire on $1,000,000, but it’s true. For those that are in their early thirties now, a million dollars just won’t cut it. You see, one million dollars today just will not carry the same value twenty to thirty years from now thanks to inflation. Even with low inflation numbers, the effet over 20 or 30 years can dent your plans big time. To show you what we are talking about, let’sl look at something called Present Value.
Present Value is defined as the monetary value today of a future income stream, given a certain rate of return. In other words present value accounts for the time value of money.
Using our Present Value Calculator we can illustrate exactly what we mean. So, let’s set our variables. Let’s look at a 25 year old individual who wants to retire at age 65.
1) We input $1,000,000 as the Future Value
2) We then input 3% as the discount rate. This 3% accounts for the average annual inflation you will experience over the next 40 years. This inflation number is based on our nations recent averages. If we were to experience inflation rates like those back in the 70’s or 80’s then these numbers would need to be adjusted.
3) Enter 40 years for the time frame until you are set to retire.
4) Select Annually for the compound option. You can choose your option here.
Our result is that $1,000,000 40 years from now would be like trying to retire on $306,556.84 in today’s dollars. Now this is still a large number but it’s a far cry from one million. Yes, you could live comfortably on that figure. We simply want to people to see that when planning your retirement you should strongly consider the present value of your investments and what the buying power of your nestegg will be 40 years from now.
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