My previous post discussed determining needs for retirement life, and for our example calculated we’d need $2.1M.  Ouch.  But here’s the thing, remember that’s with dollars way into the future (inflation adjusted), and if you have some discipline you can get there.  Here’s our approach.   For our financial  projections, we’ll look at each group of assets as we did with with our retirement needs, and try to figure out how they will grow with time.

1. Home.  Your home is one of your larger assets, and should grow in price like other assets and as you pay down your mortgage.  We should be ale to get a reasonable current value of our home using sites such as zillow.  Though not exact, it’s reasonable to assume an increase in value of 2.5% per year.  Each year we also subtract off the principal portion of our mortgage, available from your amortization schedule (Microsoft Excel has a template for this if you need it).  The equity in your home equates to

Home equity = (Current home value) x 1.025^years  -Principal Owed

For example, a person retiring in 35 years with a $300K home today, starting with a $240K mortgage at 4%, the home equity looks like this

2. Retirement savings.  Though historical data for stocks is higher, I like to assume an average combined return of 6%, assuming you’ll be allocating assets to a mix of stocks and bonds.  Hopefully your return will be higher, but this is reasonably conservative assumption.  You’ll probably be able to increase the amount you invest each year, but we’ll assume this is fixed.  The easiest way to calculate this is using the Excel formula for future value,

FV = (Current Value, interest rate, years, yearly deposit)

Also, remember money in a 401k or IRA is not available until age 59.5.  So, for example, a 30 year old saving $7200 per year with a current account of $50K:

3. Regular Savings.  Similar to the above savings, however now we don’t have the benefit of tax deferred savings like the 401k, and also part of this savings is in your emergency fund, which will necessarily have a lower return.  I think a reasonable assumed return on investment is 4%, again hopefully you’ll do better.  For example, a 30 year old saving $2000 per year with a current account of $10K:

4. College Savings. Assuming you have kids (congrats!) college savings is another bucket for accumulation of assets.  Assuming you are using a 529 plan, these earnings are tax free, but also should get more conservative (=lower rate of return) as your child gets closer to college age.  Here I recommend assuming a rate of return of 5%.  For example, let’s assume you’re putting away $100 per month for your child.  This probably won’t be enough to cover the whole bill, but will take out a good chunk:

Finally, we sum up all all the curves and compare it to your needs from our earlier post.  For our example:

Whoa.  Made it!  We didn’t have to assume ridiculous returns and we didn’t have to save $50k a year!  Hopefully, this shows you this is achievable.  We made some pretty conservative assumptions, but we show making it to your comfortable retirement while not eating Ramen Noodles and sacrificing Netflix during your working years.  Notice what it takes is discipline to save every month, and starting early.

One other big caveat.  All my calculations and assumptions above show nice smooth curves as your assets grow.  This is far from reality, but a reasonable estimate for projections.  No one can tell you if you will definitely make your financial goal.  In a future post, we’ll get into how this is really just a best guess, and calculate the probabilities of getting there.