accountingsucks
Recycles dryer sheets
- Joined
- Jan 28, 2006
- Messages
- 346
Was playing around in Excel today and it’s very disturbing to see how very small changes in parameters lead to extremely different results. I have been toying with the idea of leaving full time work at 40 and then working on a temp/consulting basis for the next ten years. Assume the following.
Paid off home
Nest-egg at 40: $800,000
Part time employment: $25,000 after tax in first year inflated at 2% until age 50. No income until 65 when Canadian pension kicks in
Pension: Assume $18,000 per year received at age 65 inflated at 1.8% per year for Canada pension (this is in future dollars – about $11k in today’s money)
Spend: $40,000 per year inflated at 2.5% per year (after tax)
Return: Assume a constant 5.5% return each year from a 60/40 portfolio
Result: At age 95 left with $773,000
Now, change the return from 5.5% to 5% and we get a deficit of $845,000 a $1.6Million difference for just a .5% change to our return
OK, now go back and assume the 5.5% return on investments again, but assume inflation increases 3.5% each year (rather than 2.5%) on our expenses starting with that $40K expended in year one. Result is now a $4.2Million deficit at age 95!!!!!
Am I doing something wrong in my calculations? This is very eye opening for me. Presumably if expenses were going up at a rate of 3.5% one would do some serious cutting to get the withdrawal rate back in line but I think it shows how fast things can go off the rails.
Paid off home
Nest-egg at 40: $800,000
Part time employment: $25,000 after tax in first year inflated at 2% until age 50. No income until 65 when Canadian pension kicks in
Pension: Assume $18,000 per year received at age 65 inflated at 1.8% per year for Canada pension (this is in future dollars – about $11k in today’s money)
Spend: $40,000 per year inflated at 2.5% per year (after tax)
Return: Assume a constant 5.5% return each year from a 60/40 portfolio
Result: At age 95 left with $773,000
Now, change the return from 5.5% to 5% and we get a deficit of $845,000 a $1.6Million difference for just a .5% change to our return
OK, now go back and assume the 5.5% return on investments again, but assume inflation increases 3.5% each year (rather than 2.5%) on our expenses starting with that $40K expended in year one. Result is now a $4.2Million deficit at age 95!!!!!
Am I doing something wrong in my calculations? This is very eye opening for me. Presumably if expenses were going up at a rate of 3.5% one would do some serious cutting to get the withdrawal rate back in line but I think it shows how fast things can go off the rails.