Question

Is $1 Million Enough to Retire?

This headline is from a recent popular business publication. The answer as to how much you need to retire can be calculated using the time value of money tools, describe in detail what steps you would take to calculate the amount needed. Remember to state what time value tools you should use. Assume that this retirement will last for 20 years and will need to use $4,000 per month. If any interest rate is required please estimate.

please show all calculations

Answer 1

As per the question, the monthly needs cost is $4,000, which is $48,000 ( 4000*12) per year.

So we need 48,000 per year till 20 years.

But the value of money changes year on year due to inflation / defaltion / Interest rate changes year on year and many economic factors, which is time value of money.

We can caluclate the amount required to lilve for 20 years by discounting the amount per year to current year. which is bringing the money to present value and estimating the amount needed.

For that we need to take on interest rate to bring the money value to current year, lets assume 5% per year on average basis.

So that means, yealry cash flow is $48,000

Period is 20 Years

Rate is 5%

Caluclating the Present value of Money
Year	Cashflow	Present Value factor @5%	Present value
1	48,000	0.952	45,714.29
2	48,000	0.907	43,537.41
3	48,000	0.864	41,464.20
4	48,000	0.823	39,489.72
5	48,000	0.784	37,609.26
6	48,000	0.746	35,818.34
7	48,000	0.711	34,112.70
8	48,000	0.677	32,488.29
9	48,000	0.645	30,941.23
10	48,000	0.614	29,467.84
11	48,000	0.585	28,064.61
12	48,000	0.557	26,728.20
13	48,000	0.530	25,455.42
14	48,000	0.505	24,243.26
15	48,000	0.481	23,088.82
16	48,000	0.458	21,989.35
17	48,000	0.436	20,942.24
18	48,000	0.416	19,944.99
19	48,000	0.396	18,995.23
20	48,000	0.377	18,090.70
Present Value	5,98,186.10

That indicate we don't need $ 10,00,000 for 20 years of retirement, at the rate of 5%, $ 5,98,186.10 to retire.