## Funding Your Retirement

This calculator is useful for anyone that wants to understand how much they need to save each year to reach a retirement fund goal. It’s very similar to our millionaire calculator except the user can specify any target retirement funding goal they wish. Our calculator requires a total of five input values:

- The user’s current age, or the age they want to start saving for retirement
- The desired retirement age, this information is used to determine the number of years over which funding occurs
- The target retirement funds, meaning the sum of money the user would like to have when retired
- An annual rate of return on the invested funds

The calculator then provides the user with two sets of values:

- The first data point is the annual funding rate. The calculator assumes the money flows into the account over the course of a year
- A chart showing five equally spaced timeframes and the total funds in the account at each point. Note the units used in the chart are thousands.

### Targeting Retirement Funds

While this calculator is admittedly very simple, it can give the user a rough idea of how much they need to save each year to have what they believe are sufficient funds in their retirement account. The calculator also demonstrates the advantages of starting to fund an account early in your career. That’s not to say someone in their 50’s needs to give up on saving for retirement. It just means that saving is a lot less “painful” if you start saving in your 20’s. We can illustrate this with a couple of examples.

Bill is 50 years old, and he would like to have 500,000 in his retirement account when he retires at age 67. Bill thinks he can earn around 10% on his funds annually. Unfortunately, Bill has not yet set money aside for retirement.

In this example, Bill needs to save 12,332 annually to reach his goal of 500,000 in 17 years.

Lindsey is 22 years old and would also like to have 500,000 in her retirement account when she leaves the workforce at age 67. As is the case with Bill, Lindsey also thinks she can earn around 10% annually on her funds. Lindsey is right out of school, so she is just opening her first retirement account.

In this example, Lindsey has 45 years to save and only needs to set aside 696 each year to achieve her goal.

### Factoring in Inflation

Now some of you may be saying to yourself the 500,000 that Bill saves over the next 17 years is worth a lot more than Lindsey’s 500,000 in 45 years due to inflation. Well, that is true. To make this a more accurate comparison, we’ve determined that Bill’s 500,000 is worth about 328,600 today using a 2.5% rate of inflation. Lindsey’s 500,000 45 years from now is only worth 164,600. In fact, Lindsey would need to have 998,250 in savings 45 years from now to have the same purchasing power as Bill’s 500,000 in 17 years. To hit that target, Lindsey needs to save 1,389 per year – still far less than Bill’s rate of 12,332 per year.

### Modeling Return on Investment

In a competitive market, the return we can expect to realize on our investment is typically a function of the risk. Safe investments, like government bonds will have relatively low returns. Riskier investments, like common stocks, will usually provide us with higher returns over the long term. For example, the S&P 500 Index has an average return of around 10.8% over the last 50 years. This tells us that for longer-term planning purposes, it is reasonable to model a return of around 10% if those funds are placed in an investment that tracks well with the S&P 500 Index.

### Target Retirement Funds

In addition to trying to figure out an appropriate return on investment, it’s also useful to understand how much funding we need once retired. Those calculations require a different set of modeling assumptions than we have in this calculator We do plan to offer such a tool. Check out our complete list of online calculators to see if it’s already available to run through some “what-if” scenarios. If not, bookmark this website because the calculator will be published in the not-too-distant future.