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Discussion Starter #1
Hi there, I'm trying to figure out how much I need to put away until I retire. I am looking for some validation over my numbers and also I need to get a formula to figure out some dividend stuff.

So I am 28 now and would like ideally to have the option of retiring at 50 (even though I suspect after running through the numbers it will be 60 ;) ).

I can put away roughly 10k per year into retirement. I want to invest into growth dividend stocks. I want around 2500 each month in dividend income.

Soooo....

+ Age to retirement: 22 years
+ Income required in todays money: 2500
+ Expected dividend yield: 4%
+ Expected dividend growth: 4%

So what I first did was to figure out what $2,500 might look like in the future. Using the future value calculation it works out to $5924. This is what i need per month, in 22 years time.

So that is $71,088 per year in future value. At 2,500 per month current value, I don't see any tax when receiving dividends, using taxtips.ca calculator, so I assume this will be the same 22 years in the future. Hopefully.

71,088 is the expected rate of 4% of a lump sum invested in dividend yielding stocks. Therefore the original sum should be $1,777,200. (71088/0.04)

Now my main question is, what forumula do I use to figure out how much I have to save per month to achieve this? I want something that I can plug in, dividend growth, dividend yield, monthly or yearly contributions, and the final original sum.

I looked at http://en.wikipedia.org/wiki/Time_value_of_money#Future_value_of_a_growing_annuity the future value of a growing annuity, however it doesn't seem to take into account the extra yearly contributions i want to make.

Any help would be greatly appreciated :D
 

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You are missing a couple of inputs.

What's the expected duration of your retirement?

And what rate did you assume to get your FV calculation?

But at a basic level, you want to solve for x years of distributions (while the remaining funds are earning y). You need two calculations: the lump sum sufficient to produce the distributions, and then the contributions required to build to that lump sum over the years between now and when you want the lump sum.

I caution you that the model you are building is very, very, very basic and does not replicate reality. However, it is a fine starting point. I suggest you read at least this one article to understand why you are not building a model that will work.

I'm sure someone else here will pop in with a comment about your return assumptions.
 

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Discussion Starter #3
Thanks, I'll read the article.

I guess my plan for retirement is different to the norm of - "I will save up 1 million dollars, retire at the age of 65, then live off that 1 million dollars by taking chunks of it out".

If i build up a dividend yielding portfolio, i will be paid a minimum of $71,088 per year for the rest of my life. (Assuming the dividends keep getting paid). Therefore there would be no reason to calculate the duration of my retirement. I could live to the age of 130! *fingers crossed*

I used an inflation value of 4% for my Future Value. Mind you it could well be higher realistically with American Fiat money being printed left right and center!
 

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Anyone can say I need a retirement lifestyle of 70K per year, and as long as their current salary and/or their current nest egg is sufficient, then the dream can be realized. The question is, is your current salary and/or savings commensurate with that goal? You could live under a bridge and eat in a soup kitchen while you bank 99% of your paycheck, and reach that goal, but who is going to want that life?

You must identify your current assets (nest egg and salary asset) along with your two basic time parameters: retirement age and diebroke age in order to do this kind of plan justice. So.... gross salary, current savings, retirement age and diebroke age (it can be 140 if you want) Along with a savings growth rate and reasonable inflation rate. Then the calculation can make sense. Forget the dividend, zero taxes stuff for the time being.
 

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Technically, using the basic $71,088 calculation you did. You probably would get a raise annually in your retirement income that would probably outpace inflation, if the companies you invested in, annually raised their dividends.
 

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These are questions and subjects I am currently struggling with. My current strategy consists of saving as much money as possible (while still having a good lifestyle) and see if I have enough money to retire at 45 (7 years from now). The biggest wildcard in my situation is the tricky subject of inheritance. If can acheive at million dollar plus portfolio at 45, then this money only has to last 20-25 years, when a sizable inheritance would likely factor in.

It is probably not smart to count on an inheritance, but in my situation, its a factor I can't ignore. I do feel a bit slimy even thinking about the subject though....
 

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As I mentioned in another thread.... the simplistic paradigm... saving for retirement, living off the retirement nest egg when retired, dying broke at 90-95-100... is just that... simplistic. When you factor in future cash infusions such as selling the cottage, or that inheritance, paying off that loan in 5 years, CPP/OAS.... all these cash flows come at various times either as single lump sums or spread out (as loan pmts, entitlements).

Cash flow planning isn't something you can address in a book or a set of tables... you need to address the math programmatically.
 
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