So how can you know if your current savings rate will increase the odds you get where you need/want to go? Or, if you’re not saving yet (or not saving much), how can you tell how much you should save?
If you read Chapter 6 and looked at Appendix B, presumably you have an idea of the cash flow you want in retirement from your portfolio (expenses minus other sources of income). For our purposes, let’s make a nice round number assumption—you want $100,000 in today’s dollars when you retire in 20 years.
But 20 years’ worth of inflation can make a big difference. How can you figure how much you need in future dollars? Easy: Solve for future inflation. You want to know the compounding impact an average inflation rate will have on today’s dollars—do that by solving for future value.
If you’re a whiz on Excel or have a good calculator, you can do this in three seconds with Excel’s FV function (or a similar function in your calculator). For you pencil-and-paper types (or for those of you who want to know what the heck Excel is doing for you), you do it thusly:
FV is, of course, future value. PV is present value—what the amount is today, i is the interest rate—here assume an average inflation rate—and n is the number of years between now and then.
You already know you want $100,000 in today’s dollars and plan on retiring in 20 years. For the inflation rate, you could use 3%—inflation’s ...