Don't let it get away!
Help yourself with the Fool's FREE and easy new watchlist service today.
If you socked away an additional $100 a month starting today, what would that buy you in retirement? An extra meal at Denny's? A membership to a ritzier country club? A down payment on a vacation home?
We can't know exactly what a lifetime's savings will purchase decades hence, but with a few assumptions and some simple calculations, we can get a rough estimate. Let's start with the assumptions:
- A rate of return: Historically, stocks have returned around 9% per year, on average, and bonds around 5%. Will both continue to do so in the decades to come? Who knows, but when it comes to financial planning, it's best to use conservative estimates.
- Years invested: How many years until you retire?
- A rate of inflation: It's handy to know that investing $100 a month for 20 years and earning 8% annually gets you $60,000. Unfortunately, 60 grand in 2030 won't buy what it does today. Inflation runs, historically, between 3% and 4% annually. Here's another way to look at it, using the Rule of 72: The purchasing power of a dollar gets cut in half every 18 to 24 years.
- A withdrawal rate: Once you retire, how much can you take from your nest egg and be reasonably sure you won't outlive your money? Most studies conclude that a safe withdrawal rate ranges from 4% to 6% of a retiree's portfolio, depending on the length of the retirement (i.e., the number of years between the day you quit your job and the day you quit this life). If you retire young, then withdrawing more than 4% increases the probability that you will go broke.
Now, let's run the numbers.
Go to the Fool's calculators page, and scroll down to the "How much will my savings be worth?" calculator (under the "Savings" heading).
Fill in the blanks. Enter zero in "Amount You Have Invested," since we're looking at additional savings. Also enter zeroes in the tax blanks, since we'll assume you're contributing to a tax-friendly Roth IRA.
Click the "Results" tab, and then multiply the result by 0.04 for a withdrawal rate of 4% (or 0.05 for 5%, if you're retiring later in life).
Divide that amount by 12 and -- voila! -- you get an estimate of monthly retirement income attributable to your saving $100 more per month.
Assuming an 8% annual return, 3% inflation, and a 4% withdrawal rate, someone who is 20 years from retirement might reap an extra $135 in monthly retirement income from saving an additional $100 a month today. (The $135 is adjusted for inflation; that person would really be able to spend an extra $194 a month, but 20 years from now it would purchase just 69% of what $194 buys today, assuming 3% annual inflation.) If you have 30 years until retirement, an extra Franklin invested monthly could provide an extra $270 (again, in today's dollars) in retirement. And that's just $100 earning 8% annually. If you go crazy and save an extra $250 a month and earn an average 10% a year for 30 years, you'd pump up your monthly retirement income by almost a thousand bucks. So go nuts -- play with the calculators to see what saving an extra $200, $300, or even $500 a month can do for your golden years. Your future self and future Denny's employees will be very grateful.
Looking for other ways to boost your retirement prospects? Check out the fee-only financial advisors of the Garrett Planning Network, who are now offering a limited-time 10% discount to Motley Fool readers. Just click on your state on the Locate an Advisor map and look for the Fool logo for participating advisors.