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:
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.
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% gets you $60,000. Unfortunately, 60 grand in 2023 won't buy what it does today. Inflation runs, historically, between 3% and 4%. 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. If you retire young, then withdrawing more than 5% 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 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. And that's just an extra $100 -- play with the calculators to see what saving an extra $200, $300, or even $500 a month can do for your golden years.
So what are you waiting for? Up your savings today, and start accumulating money for that future food, golf, and/or beachfront property.
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