Step 2 – Monthly Savings to Reach Retirement Goals

How much money do I need to save each month to reach that nest egg?

             I decided to stick to a 30 year time horizon and include the chart from my excel program that shows how much a person needs to save each month.  You will notice the bottom line is for those who already have savings set aside that we should account for.

Same thing as before, read the chart left to right.  First we look at how much monthly savings is available.  Then we look at how many years we have to save that money.  Lastly, we hope for some sort of rate of return on those savings. You will notice I picked a hypothetical 8% per year as the assumed rate of return over a 30 year period. Keep in mind that past performance is not indicative of future results.  Rates of return will fluctuate and your accumulation value may be higher or lower than those shown below.

How much do I need to save Chart

This is a hypothetical example for illustrative purposes only.  It is not indicative of any particular investment or guarantee of future performance.
These values assume that the currently assumed hypothetical elements will continue unchanged for all years shown. This is not likely to occur and actual results may be more or less favorable than those shown.  It does not take into account the reduction of potential fees and expenses.  If it did, results would be lower than those shown.

Hypothetically speaking, say you determined you needed about $2,000,000 to retire in 30 years.  If you look at the right side of the chart, find roughly where $2,000,000 is and then go back to the left side to see how much savings needs to be invested each month you will see its between $1250 and $1500 a month.  Keep in mind, if you do have an employer match, pension or feel you can count on social security, than that should be factored in.  Ignoring pensions and social security, you might have an employer that matches 50 cents on every dollar you put in your 401k.  So if you put in $1000 a month they would put in $500 a month.  If you are fortunate enough to have an employer with that generous of a 401k match then you have to come up with $1000 a month to put in and they will take care of the $500 and that alone will help get you on your way to your retirement goal in this example.

One nice benefit to using this step by step process is you already accounted for inflation in Step 1.  We decided on a hypothetical inflation rate and used that in our calculations to determine the total amount of money needed at retirement.  So the total sum of money we came up with had an assumed inflation rate factored in.  That helps us because when we go to the next chart, we only have to find the amount needed to save each month to get to that end result vs. having to find a dollar amount but then increase it each year by an assumed inflation rate.  So that means, in the above hypothetical example, you only need to save $1000 a month and not increase it later on as you get raises, promotions, bonuses, etc.  Some retirement plans have you increasing as time goes on and hopes those pay raises, bonuses, etc. come into play.  I like to start with saving exactly what needs to be saved (of course only if it’s possible and won’t leave you starving at the end of the day) and as you do get pay raises you can have fun with that extra income vs. having to save more and more as time goes on.

Lastly, the assumptions we used could be low or high, so this strategy does call for some flexibility as time goes on, but if our assumptions are pretty close, you may not have to change things too much as the years roll on by.

For Step 3, look for my next post…Step 3 – Where should I save for retirement?

2107619 / DOFU 5-2018