Target Retirement Amount

Overview

One half of the problem of determining how to plan for retirement is a calculation of the amount of money needed on day one of retirement. That is, how much money should the individual have to live a comfortable retirement when they are no longer earning money that can be saved.

The variables in the calculation are

• Consumption rate - Amount of money needed each year of retirement for consumption
• Financial Returns - The return that can be earned on the retirement money that has not been spent yet
• Years - The number of years of retirement

Technically, each variable is random, that is, we will not know the value of each variable ahead of time. In addition, both the consumption rate and financial returns are not the same for each period (year) of retirement. The complexity of each model is dictated by how it deals with these variables.

Topics

• Straight Calculation - simple (Present Value) calculation of the amount of money needed without adding any complexities like random interest rates or random consumption. Forms the baseline calculation, which gets extended by adding randomness. (see below)
• Adding Randomness - to make the model more robust, and to calculate statistical quantities such as the probability of having a funding shortfall, requires adding randomness to the model.