If you socked away an additional $100 a month starting today, what would that buy you in retirement? Membership at a ritzier country club? Will it pay for groceries in your golden years, or even the mortgage 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:
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A rate of return: Historically, stocks have returned on average 10% to 11% per year, and bonds, 5% to 6%. 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.
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Years invested: How many years until you retire?
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A rate of inflation: It's handy to know that investing $100 a month for 20 years and earning 8% gets you $60,000. Unfortunately, 60 grand in 2023 won't buy what it does today. Inflation runs, historically, between 3% and 4%.
- 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. Withdrawing more than 5% increases the probability that you will go broke.
Now, let's run the numbers.
- Go to the 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 IRA.
- Click the "Results!" tab, and then multiply the result by 0.04 for a withdrawal rate of 4%; 0.05 for 5%; or 0.06 for 6%.
- Divide that amount by 12 and -- voilà! -- you get an estimate of monthly retirement income attributable to your saving $100 more per month.
Assuming an 8% annual return, 3% inflation, and 5% withdrawal rate, someone who is 20 years from retirement might reap an extra $168 (inflation-adjusted) in monthly retirement income from saving an additional $100 a month. If you have 30 years until retirement, an extra Franklin invested monthly could provide an extra $338 (again, in today's dollars) in retirement.
So what are you waiting for? Up your savings today, and start accumulating money for that future food, golf, and/or beachfront property.
