Can you turn these variables into something like a plan?

December 6, 2014 5:01 AM

Help me take these numbers and variables and work them into a planning/predictive equation.

I would like to take a couple years off work to complete a creative project. Is there a way to predict/create a time when I can be 2 years “ahead” of my retirement goal and also have enough to live on for 2 years? Help me do the maths.

I would like to retire in about 30 years.
I have S in savings/emergency fund.
I have R in a Roth IRA.
I have I in investments.
I spend about M dollars a month. (assume this to be fixed)
I earn X per year.
I pay D in per month in student loans, being repaid in Income-based Repayment.
I have Y in a work-loan, reduced at 20% a year (100% repaid in 5 years)

Am I missing any variables that might impact this? Any other thoughts on doing this sort of planning? I've never done it before. Thanks!

posted by Calicatt to Work & Money (4 answers total)

You're missing the opportunity cost of two years of savings. Not only that, but the loss of compounding interest not only on the money not saved, but on the money you HAVE saved and will spend to support yourself during this endeavor.

Because of compounding interest, the longer you wait, the less money you'll lose.
posted by Ruthless Bunny at 5:06 AM on December 6, 2014

Response by poster: Because of compounding interest, the longer you wait, the less money you'll lose.

Yes--this is the sort of thing I'm trying to wrestle with. How can I calculate this/factor it in?
posted by Calicatt at 6:01 AM on December 6, 2014

This isn't going to be a single equation (I think), but you can build an excel or google docs spreadsheet that will help you figure it out. I have to run otherwise I'd try to sketch something out. You can use the FV() function to calculate the compounding interest in your investments.

You'll need to know how much money you will need in your retirement savings when you retire by figuring out your goal monthly spending in retirement. Assume that you will want an amount that will give you that income if you withdraw 4% a year. Don't forget to factor in inflation--if your current spending is (for example) $25,000, in 30 years that will be closer to $50,000.

Once you have that number, you can start to work backward by testing different scenarios of how much you put away every year (towards your retirement or towards a "2 year project fund") and seeing how that affects your final savings number.

(IANAFP (financial planner), I just like spreadsheets)
posted by quaking fajita at 6:17 AM on December 6, 2014 [2 favorites]

Very simplistically, the answer is that if your current income of $X is sufficient to cover all of your costs plus save adequately towards retirement, to take your two years off with no impact to your lifestyle and your retirement planning you will need a separate savings account with an equivalent amount to your takehome earnings for two years. That will allow you to pay your debts, continue your retirement contributions, and maintain your current lifestyle.

(Because your debts are changing with time, this number will obviously change depending on when you take those two years off, but the needed amount is still going to be two years worth of debt payments plus living expenses plus retirement contributions.)
posted by Dip Flash at 7:32 AM on December 6, 2014 [2 favorites]