March 17, 1975
Derived by Bill Larsen
1 Determine the retirement needs per year in current dollars.
2 Determine the following variables:
2.1 Rate of return assets will earn I = __________
2.2 Inflation rate G = __________
2.3 Years till retirement N = __________
2.4 Number of years in retirement X = __________
2.5 Present value of retirement assets PV= __________
3 Calculate future value of retirement needs per year.
FVneeds= (STEP 1) * (1+G)N
Future value of needs at retirement
4 Calculate future value of assets required to sustain retirement needs in step 3.
Effective Rate of Return
FVassets =(STEP 3)*((1+Ie)X-1)/((1+Ie)X *(1+G)*Ie)
Future value of assets needed.
5 Calculate the amount to save each year to reach goal in step 4. Increase amount saved each year by inflation or own goal. NOTE: If other than inflation a new effective rate must be calculated for this step only.
SAVEyear=((STEP 4)/(1+I)N))*(1+G)*(1+Ie)N *Ie/((1+Ie)N-1)
IF YOU HAVE PRESENT ASSETS
SAVEyear=((STEP 4)/(1+I)N-PV))*(1+G)*(1+Ie)N * Ie/((1+Ie)N-1)
6 Recalculate each year up till retirement to minimize any large fluctuations in rate of
inflation, savings rate and retirement age.
7 During retirement recalculate yearly disbursements based on the previous years variables determined in step 2. Note: X will decrease each year you are retired.
DISBURSEMENT= (ASSETS*(1+G)*(1+Ie)X * Ie)/((1+Ie)X-1)
PICTORIAL CORRECT FORMULAS