BY amfcon The purpose of this post is to show three ways in which most financial advisors calculate your retirement saving plan: (1) a Financial Independent Number (FIN), (2) an Excel spreadsheet using a historical rate of return with 401(k), and (3) illustrations using index plans. In the end, you can decide which plan saves you the most money and gives you the highest return on investment.
Mr. Bill Smith is 42 years old and a non-smoker. He is planning to retire in 23 years at age 65. His retirement goal is $65k – $66k per year after a 22% income tax.
- Financial Independent Number:
Many financial advisors will calculate your or Bill’s Financial Independent Number (FIN) for monthly saving contributions into retirement plans.
(a) FIN = $65,000 (Retirement Goal) x 30 years (age 65-95) = $1.95 million.
This means Bill needs to save 1.95 million in 23 years.
It comes out to $7,065 per month he needs to save for 23 years.
(b) Let’s use cumulative Future Value formula:
Future = [A x (((1+r/n)^nt – 1)/(r/n)) ], A = Future/(((1+r/n)^nt – 1)/(r/n))
Assume rate of return=7%. What will be the monthly premium (A)?
1,946,894.28 = A × (((1 + 0.07/12) ^ (12 × 23) – 1) ÷ (0.07/12))
A= $1.95 million/682 = $2850/month
So Bill needs to save $2,850 per month for his retirement goal.
- Excel Spreadsheet from the S & P 500 historical rate of return and cumulative formula:
Here I have used an excel spreadsheet with compound future value formula and historical S&P 500 rate of returns.
The excel spreadsheet shows if Bill is saving $1,500 per month for 23 years, with a historical S & P 500 return rate and compound future value formula, he will have around $1.14 million in his 401(k) retirement plan as you see in Table 1 below. Need to save $1,500 per month.
| YEAR | S&P 500 ROR | Premium $20K/Yr | Premium + Last year Balance | Interest Earned | 2% Broker Fee | S&P 500/401(k) TOTAL CASH |
| 1999 | 21.04% | $18,000 | $18,000.00 | $3,787.20 | $360.00 | $21,427.20 |
| 2000 | -9.10% | $18,000 | $39,427.20 | -$3,587.88 | $788.54 | $35,050.78 |
| 2001 | -11.89% | $18,000 | $53,050.78 | -$6,307.74 | $1,061.02 | $45,682.03 |
| 2002 | -22.10% | $18,000 | $63,682.03 | -$14,073.73 | $1,273.64 | $48,334.66 |
| 2003 | 28.69% | $18,000 | $66,334.66 | $19,031.41 | $1,326.69 | $84,039.38 |
| 2004 | 10.88% | $18,000 | $102,039.38 | $11,101.88 | $2,040.79 | $111,100.48 |
| 2005 | 4.91% | $18,000 | $129,100.48 | $6,338.83 | $2,582.01 | $132,857.30 |
| 2006 | 15.79% | $18,000 | $150,857.30 | $23,820.37 | $3,017.15 | $171,660.52 |
| 2007 | 5.49% | $18,000 | $189,660.52 | $10,412.36 | $3,793.21 | $196,279.67 |
| 2008 | -37.00% | $18,000 | $214,279.67 | -$79,283.48 | $4,285.59 | $130,710.60 |
| 2009 | 26.45% | $18,000 | $148,710.60 | $39,333.95 | $2,974.21 | $185,070.34 |
| 2010 | 15.06% | $18,000 | $203,070.34 | $30,582.39 | $4,061.41 | $229,591.33 |
| 2011 | 2.11% | $18,000 | $247,591.33 | $5,224.18 | $4,951.83 | $247,863.68 |
| 2012 | 16.00% | $18,000 | $265,863.68 | $42,538.19 | $5,317.27 | $303,084.60 |
| 2013 | 32.39% | $18,000 | $321,084.60 | $103,999.30 | $6,421.69 | $418,662.20 |
| 2014 | 13.69% | $18,000 | $436,662.20 | $59,779.06 | $8,733.24 | $487,708.02 |
| 2015 | 1.38% | $18,000 | $505,708.02 | $6,978.77 | $10,114.16 | $502,572.63 |
| 2016 | 11.96% | $18,000 | $520,572.63 | $62,260.49 | $10,411.45 | $572,421.66 |
| 2017 | 21.83% | $18,000 | $590,421.66 | $128,889.05 | $11,808.43 | $707,502.27 |
| 2018 | -4.38% | $18,000 | $725,502.27 | -$31,777.00 | $14,510.05 | $679,215.23 |
| 2019 | 31.49% | $18,000 | $697,215.23 | $219,553.08 | $13,944.30 | $902,824.00 |
| 2020 | 18.40% | $18,000 | $920,824.00 | $169,431.62 | $18,416.48 | $1,071,839.14 |
| 2021 | 28.71% | $18,000 | $1,089,839.14 | $312,892.82 | $21,796.78 | $1,380,935.17 |
| 2022 | -16.14% | $18,000 | $1,398,935.17 | -$225,788.14 | $27,978.70 | $1,145,168.33 |
Table 1: Compound Interest Formula & S&P 500 Historical Rate of Return
As you see in Table 2, if he withdraws $85,000 (7.4%) per year, after income tax he will be left with $66k per month for 30 years.
But no one knows about the future. As we grow older and older, we spend more money on medical treatments. If he suffered a heart attack and had to be admitted to the hospital, the problem would arise. Medicare and health insurers wouldn’t cover the entire bill for the hospitalization. Then he will need to withdraw from his savings. Consequently, he will run out of money sooner for taking more than $85k per year.
| Age | Every Year Balance | Withdraw | TAX- 22% | Balance After Tax | ROR 7 % – Fee 0% = 7% | Total Balance Each Year |
| 65 | $1,145,168.33 | $85,000 | $18,700 | $66,300 | 1.0700 | $1,134,380.11 |
| 66 | $1,134,380.11 | $85,000 | $18,700 | $66,300 | 1.0700 | $1,122,836.72 |
| 67 | $1,122,836.72 | $85,000 | $18,700 | $66,300 | 1.0700 | $1,110,485.29 |
| 68 | $1,110,485.29 | $85,000 | $18,700 | $66,300 | 1.0700 | $1,097,269.26 |
| 69 | $1,097,269.26 | $85,000 | $18,700 | $66,300 | 1.0700 | $1,083,128.11 |
| 70 | $1,083,128.11 | $85,000 | $18,700 | $66,300 | 1.0700 | $1,067,997.08 |
| 71 | $1,067,997.08 | $85,000 | $18,700 | $66,300 | 1.0700 | $1,051,806.87 |
| 72 | $1,051,806.87 | $85,000 | $18,700 | $66,300 | 1.0700 | $1,034,483.35 |
| 73 | $1,034,483.35 | $85,000 | $18,700 | $66,300 | 1.0700 | $1,015,947.19 |
| 74 | $1,015,947.19 | $85,000 | $18,700 | $66,300 | 1.0700 | $996,113.49 |
| 75 | $996,113.49 | $85,000 | $18,700 | $66,300 | 1.0700 | $974,891.44 |
| 76 | $974,891.44 | $85,000 | $18,700 | $66,300 | 1.0700 | $952,183.84 |
| 77 | $952,183.84 | $85,000 | $18,700 | $66,300 | 1.0700 | $927,886.71 |
| 78 | $927,886.71 | $85,000 | $18,700 | $66,300 | 1.0700 | $901,888.78 |
| 79 | $901,888.78 | $85,000 | $18,700 | $66,300 | 1.0700 | $874,070.99 |
| 80 | $874,070.99 | $85,000 | $18,700 | $66,300 | 1.0700 | $844,305.96 |
| 81 | $844,305.96 | $85,000 | $18,700 | $66,300 | 1.0700 | $812,457.38 |
| 82 | $812,457.38 | $85,000 | $18,700 | $66,300 | 1.0700 | $778,379.39 |
| 83 | $778,379.39 | $85,000 | $18,700 | $66,300 | 1.0700 | $741,915.95 |
| 84 | $741,915.95 | $85,000 | $18,700 | $66,300 | 1.0700 | $702,900.07 |
| 85 | $702,900.07 | $85,000 | $18,700 | $66,300 | 1.0700 | $661,153.07 |
| 86 | $661,153.07 | $85,000 | $18,700 | $66,300 | 1.0700 | $616,483.79 |
| 87 | $616,483.79 | $85,000 | $18,700 | $66,300 | 1.0700 | $568,687.65 |
| 88 | $568,687.65 | $85,000 | $18,700 | $66,300 | 1.0700 | $517,545.79 |
| 89 | $517,545.79 | $85,000 | $18,700 | $66,300 | 1.0700 | $462,823.99 |
| 90 | $462,823.99 | $85,000 | $18,700 | $66,300 | 1.0700 | $404,271.67 |
| 91 | $404,271.67 | $85,000 | $18,700 | $66,300 | 1.0700 | $341,620.69 |
| 92 | $341,620.69 | $85,000 | $18,700 | $66,300 | 1.0700 | $274,584.14 |
| 93 | $274,584.14 | $85,000 | $18,700 | $66,300 | 1.0700 | $202,855.03 |
| 94 | $202,855.03 | $85,000 | $18,700 | $66,300 | 1.0700 | $126,104.88 |
| 95 | $126,104.88 | $85,000 | $18,700 | $66,300 | 1.0700 | $43,982.22 |
Table 2: Spending while money is invested at 7%
- Illustrations from Indexed Plans (IUL Investment):
Many people don’t know about an IUL investment plan because they think it’s life insurance and the life insurance is for the death benefit. IUL Investment plans to offer the following benefits: (1) a high retirement income with low premiums, (2) a death benefit for your family, (3) college savings plans, and (4) favorable terms for businesses. (5) Some insurance companies offer free emergency health insurance that covers chronic illnesses, terminal illnesses, & critical illnesses. (6) Can withdraw the funds at any age without penalty.
Bill will be saving $972 per month ($11,657/year) for 23 years and at age 65, he will receive about $66,917 tax-free for 30 years or as long as he lives. Plus, he will have death benefits and medical insurance: for chronic illness, critical illness, and terminal illness. The Insurance Illustration below shows the cash value, tax-free retirement, and death benefits. He will be paying considerably less than a 401(k) plan and receive the $66k retirement he has always wanted. See IUL Illustration Part 1 & 2.
The 401(k) retirement will give Bill $66,300 per year after tax, while the IUL Investment plan gives him the same $66,910 per year tax-free, but he will be paying $528 per month less than 401(k) premiums. Bill is saving $528 per month.
So Bill has two options in getting an IUL investment: (1) Pay $1,500 per month and receive around $103,809 per year tax-free or (2) Pay $972 per month and receive around $66,917 per year tax-free.
The illustration in Part 2 shows Bill will pay $268,120 in total during the 23 years and he will be receiving around $66,917 per year tax-free. If he lives up to age 100, he has received approximately $2.3 million and his beneficiary will receive $249k tax-free.
Conclusion: Which one you would like?
| (A) Financial Independent Number | Saving $2,850 per month | $65,000 after tax |
| (B) Excel Spreadsheet: Historical ROR & Cumulative formula | Saving $1,500 per month | $66,300 after tax |
| *(c) Illustrations from Indexed Plans | Saving $972 per month | $66,917 Tax-Free |
*Comes with life insurance (family protection) and free medical emergency plan (Chronic, Critical and Terminal illness)
