Retirement Planning: Savings Strategies and Investment Considerations for Frugal and
Luxurious Scenarios
Dayal
FINC 120
Personal Financial Management
November 27, 2024
Determining the Optimal Investment Mix
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Determining an optimal investment mix involves assessing financial goals, time horizon,
and risk tolerance. A more aggressive approach during pre-retirement years will be ideal, while a
moderate to conservative approach is better for years past retirement.
Pre-Retirement Investing Plan
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In the pre-retirement years, there is a lot more flexibility concerning the amount of time
and funds to be allocated. Safety is also less of a concern since we will still have a consistent
source of income, meaning that if we lose some of our savings, we will have an easier time
bouncing back. As such, an aggressive approach of 80% stocks, with 20% towards bonds is an
appropriate mix. This will be riskier and allow for more growth due to the 80% in equity
(mainly into the S&P 500), however, there is still the safety net of the 20% in 10-year Treasury
Bonds. This mix leverages the historically strong growth of equities while providing a modest
buffer through bonds to mitigate extreme volatility. According to SmartAsset, there is
approximately a 1.7% chance that our portfolio will lose money after 10 years, which means
there is a slim chance of losing money, hence why it is better to follow this plan while still
employed.
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Post-Retirement Investing Plan
As retirement draws closer, switching to a more moderate plan of 60% stocks and 40%
bonds will yield better interest, as our savings will become more important. Losses will impact
our financial situation more after retirement, hence switching to a higher percentage of bonds to
minimize risk is wise. According to SmartAsset, this mix will have a much smaller chance of
losing money after 10 years at approximately 0.5%, making it much less riskier and more secure.
Due to being retired and no longer having an income past social security, less possibility of
financial strain due to losses will be beneficial as it would be harder to recover from them. This
mix provides a small amount of risk with decent enough growth to continue to grow our savings.
Frugal Retirement Scenario
For one to have frugal retirement, the objective would be to maintain a simple and
cost-effective lifestyle while enjoying a comfortable retirement. Charlotte, North Carolina is an
ideal location due to its relatively low cost of living, vibrant community, and access to essential
amenities. In living there, these are the assumptions we will make:
●​ Housing: A modest one-bedroom apartment in a suburban neighborhood in NC would
cost approximately $1,400 per month, which is well below many other cities in the US.
●​ Living Expenses: Basic groceries, utilities, and other essentials would total about $500
per month.
●​ Healthcare: A basic health insurance plan, including premiums and out-of-pocket
expenses, would amount to $300 per month.
●​ Entertainment and Travel: Low-cost hobbies, such as attending free community events,
time spent outside in parks and other natural locations, as well as regional trips and
budget-friendly vacations, would cost around $200 monthly.
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The total monthly expenses would amount to $2,400 or $28,000 annually. Using the
Present Value (PV) formula: PV = C × [(1 - (1 + r)^(-n)) / r] where
●​ C = 28,000,
●​ r = 4.5% (0.045)
●​ n = 30 years,
the required nest egg is calculated as:
PV = 28,800 × [ (1 − (1+0.045)^-30) / 0.045] ≈ 469,120
Thus, a nest egg of approximately $469,120 would suffice for a frugal retirement.
Luxurious Retirement Scenario
For a luxurious retirement, we would opt for a higher standard of living, with a focus on
enjoying life to the fullest. We’ll assume we retire in Santa Barbara, California, known for its
beautiful scenery and luxurious lifestyle. These are the price assumptions we can ,ake if we were
living there:
●​ Housing: Renting or owning a spacious, high-end home with ocean views would cost
around $10,000 per month. This is reflective of the elevated housing costs in coastal areas
like Santa Barbara.
●​ Living Expenses: Groceries and utilities in a luxurious setting would amount to $1,000
per month.
●​ Healthcare: Comprehensive health insurance with premium services would cost
approximately $800 per month.
●​ Entertainment and Travel: We can enjoy dining out at upscale restaurants, attending
cultural events like theater and concerts, and taking international vacations. Travel and
entertainment expenses in this scenario would be around $2,000 per month, allowing for
frequent travel to exotic destinations and indulgence in luxury experiences.
The total monthly expenses would amount to $13,800, or $165,600 annually. Using the
same PV formula: PV = C × [(1 - (1 + r)^(-n)) / r] where:
●​ C = 165,600,
●​ r = 4.5% (0.045),
●​ n = 30 years,
the required nest egg is calculated as:
PV = 165000 × [ (1 - (1 + 0.045)^-30) / 0.045] ≈ 2,697,440
Thus, a nest egg of approximately $2,697,440 would be required for a luxurious retirement. We
can chart the cash flow over time this way:
Savings strategy to build the Nest Egg
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To determine how much needs to be saved annually to reach the required nest eggs in
both scenarios, we need to factor in the following things:
●​ Time to retirement: assuming the retirement age is 65 and the age at which I have my
job is 25, I will have 40 years to accumulate savings.
●​ Investment returns: using the data from the above step, we can assume an average
annual return of 7% for pre-retirement investments, based on a mix of 80% equities (S&P
500 historical average return ~10%) and 20% bonds (10-year Treasury bond yield
~2-3%).
●​ Salary Growth: A 3% annual increase is assumed based on national averages for
software developers.
●​ Savings Rate: Savings are set as a percentage of annual salary and adjusted to ensure the
final retirement fund equals or exceeds the required nest egg.
With these assumptions in mind, we can calculate for both frugal and luxurious retirement plans.
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In our frugal retirement plan, our nest egg goal, as calculated in the above step for this
plan, is $469,120 and my initial salary as a software developer in 2026 can be assumed to be
$85,000. My savings plan will include starting with saving 15% of annual salary and increasing
the savings rate by 1% every five years to adjust for salary growth. Additionally there would also
be investment savings in a portfolio yielding an average 7% return.
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For the luxurious retirement plan, the nest egg goal, calculated in step two, is $2,697,440.
Following the same starting salary of $85,000 in 2026 and my savings plan in this retirement
plan can be started with saving 25% of annual salary saved each year. I would increase the
savings rate by 2% every five years and my investment savings in a portfolio can be assumed to
yield an average of 7% returns.
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Using the formula for Future Value (FV) of a growing annuity:​
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FV = C × [ ( 1 + r)^t - (1 + g)^t ] / r - g​
we can document assumptions and calculated values for both plans this way:
Plan
Frugal Plan
Luxurious Plan
Nest egg goal (in $)
469,120
2,697,440
Initial salary (2026) (in $)
85,000
85,000
Savings rate
15% of salary, increasing
by 1% every 5 years
25% of salary, increasing by
2% every 5 years
Investment return
7% annual average yield
7% annual average yield
Retirement duration
30 years
30 years
Time to retirement
40 years
40 years
Future Value (FV) of savings
(using above formula, in $)
4,364,801
7,485,156
Here is the chart showing the retirement fund growth over 40 years for both frugal and
luxurious retirement plans. It includes:
●​ Frugal Plan: Fund growth based on saving 15% of salary annually, targeting $469,120.
●​ Luxurious Plan: Fund growth based on saving 25% of salary annually, targeting
$2,697,440.
●​ Target Nest Eggs: Dashed lines representing the required savings for each plan.
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We can make a few observations based on these calculations and data. Firstly, for both
savings plans, the future value of savings well exceeds the nest egg goals, this confirming that
both plans would be achievable due to the compounded growth of investments over 40 years. But
for the luxurious plan, this is only possible with a significantly higher savings rate. The
advantage in this one is that the high investment return ensures that the goal is met comfortably.
Incorporating the impact of raising a child
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Having a child in the US can significantly impact financial plans. From birth to the
completion of an undergraduate degree, raising a child can cost approximately $310,605,
adjusted for inflation. This includes housing, food, childcare, education and other necessities.
This breaks down to about $17,257 per year over 18 years and a lump sum of $100,000 for
undergraduate education.
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This will obviously impact one’s finances. In the frugal plan, the additional cost will
require an adjustment to the savings rate as less income will be available for retirement
contributions. This can include lowering the initial savings rate to 10% of annual income instead
of 15%, with incremental increases of 1% every five years to account for salary growth. A
portion of the savings will also be redirected to a 529 education savings plan, contributing
$5,000 annually from 2028 to 2046. This allocation ensures adequate funds for the child's
undergraduate education while maintaining steady investment returns of 7% for the retirement
portfolio. Despite these adjustments, the nest egg goal of $469,120 remains achievable, though
with slightly reduced flexibility in retirement spending.
In the luxurious plan, the higher initial savings rate provides a cushion to manage the
additional child-rearing costs. The savings rate will start at 20% of annual income, reduced from
25%, with increases of 2% every five years. Simultaneously, $8,000 will be allocated annually to
a 529 plan starting in 2028 to cover education expenses, including a $100,000 lump sum for
college in 2046. While the nest egg goal of $2,697,440 remains constant, the impact of these
costs will slightly diminish the retirement fund's growth. However, the robust investment
strategy yielding 7% annually ensures that the luxurious lifestyle in retirement is still attainable,
albeit with a careful balance between education funding and long-term savings.
This graph below shows how education funding would be done in both plans by utilizing
the 529 Plan Value.
And below, we can see how the savings contribution over time changes when you have a
child, in both a frugal and luxurious plan. We can see how the savings rate is a lot more different
in the luxurious plan than the frugal plan, showing that the more luxurious you live, the less
savings you could have, with a child.
And finally, his plot is designed to compare the impact of having a child on retirement
fund growth for both frugal and luxurious retirement plans. This allows us to compare how
having a child will affect your ability to reach your retirement goal.
References
1.​ Brookings Institution. (2022). The cost of raising a child: Inflation-adjusted estimates.
Retrieved from
https://www.brookings.edu/wp-content/uploads/2022/08/Brookings_Cost-to-raise-a-child
_inflation-adjusted-2.pdf
2.​ Vanguard. (n.d.). 529 plans. Retrieved from
https://investor.vanguard.com/accounts-plans/529-plans
3.​ Healthcare.gov. (n.d.). Childbirth costs. Retrieved from https://www.healthcare.gov/
4.​ College Board. (n.d.). Trends in college pricing. Retrieved from
https://research.collegeboard.org/trends/college-pricing
5.​ SmartAsset. (n.d.). Asset allocation calculator. Retrieved from
https://smartasset.com/investing/asset-allocation-calculator
6.​ Apartments.com. (n.d.). Rent market trends in North Carolina. Retrieved from
https://www.apartments.com/rent-market-trends/nc/
7.​ Damodaran, A. (n.d.). Historical returns on the S&P 500. Retrieved from
https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
8.​ Federal Reserve Economic Data (FRED). (n.d.). Consumer price index data. Retrieved
from https://fred.stlouisfed.org/categories/32348
9.​ SoFi. (n.d.). Cost of living in North Carolina. Retrieved from
https://www.sofi.com/cost-of-living-in-north-carolina
10.​Goertz, K. (n.d.). Cost of living in Santa Barbara. Retrieved from
https://www.katinkagoertz.com/blog/cost-of-living-in-santa-barbara/
11.​Investopedia. (n.d.). Future value of an annuity. Retrieved from
https://www.investopedia.com/terms/f/future-value-annuity.asp