The Purchasing Power Preservation Model                                                                                                                        

The most conservative method in calculating the amount of money you will need for retirement is the Purchasing Power Preservation Model.  This model maintains the purchasing power of your original retirement balance throughout your retirement by calculating how inflation will erode your return on investment.

The model requires you to estimate how many years you will be in retirement.  This is the number of years from the age you retire until your death.  The average life expectancy for a 60 year old American today is 80 years of age; for a woman it is 84.  This does not mean that if you are 60 you only have 20 or 24 more years to live.  It means that statistically, 1/2 of the individuals age sixty will have passed away by then.  For this reason you need to look at your family health history, and your individual health / lifestyle to estimate your individual life expectancy.  You should consider adding at least 5 years to your estimated life expectancy to minimize the risk of out living your money.

The step used in the Purchasing Power Preservation Model

The following steps are used to calculate the amount of money required to fund your entire retirement along with how much you will need to save per month.

Step 1.  Calculate your Wage Replacement Ratio (WRR) today using one of the two methods identified earlier (top-down or budgeting).

Step 2.  Determine gross dollar needs based on your WRR.

Step 3.  Determine your net dollar requirements by reducing your the results from step 2 by your Social Security benefits and any other savings you currently have.

Step 4.  Inflate your net dollar requirement in step 3 to your retirement age by the inflation rate to determine the first annual retirement payment.

Step 5.  Calculate the amount of money that will be required to maintain the annual payment requirement in step 4 over the full retirement life expectancy.

Step 6.  Calculate the the amount needed to have the money from step 5 remain in the bank while pulling the amount of step 4 out each year and having inflation reduce the rate of return on your investments.

Step 7.  Calculate the amount of money needed to be invested per year so that the total amount from step 6 is accumulated by retirement age.

Since the our goal is to help and educate people, we have created an excel model that you can use for free.   Just click on the link on the right.

The Financial Swami has made it simple for you; just use the link below to pull up a worksheet that will do the math for you.