Use this free savings calculator to estimate your investment growth over time. Inputs are (1) monthly deposit amount and (2) an inflation-adjusted estimate of your earning. With this growth calculator, you can set a goal and figure out how much you need to save each month to hit the mark.
Example: Estimate your rate of return and your required saving rates
If you want a plan that would support you living on $80,000 per year beginning in 40 years, you really mean $80,000 in today’s dollars—because inflation is likely to make that amount worth less than $36,000 in the future. The best and easiest way to think of everything is in today’s dollars. Use growth estimates for stocks and bonds that remove inflation.
- Without the inflation adjustment, the rates of return are normal rates of return.
- Adjust for inflation and the rates of return are real rates of return.
Historically: What’s the real average Stock market return?
All the books tell you the average stock market return was around 10 to 12% over the last century. While true, it’s misleading. The much way is to find the “annualized” growth factor and then adjust for inflation. The Compound Annual Growth Rate (CAGR) provides the smooth exponential growth rate representing the total returns over that time period (including dividends). It’s a smaller number, an it doesn’t account for inflation. Adjusted for inflation, the value in today’s dollars drops to 6.53% — and that’s before any costs or fees.
If you think the future is likely to be similarly excellent for stock holders, then you should use this factor to decide what saving rate will get you to your goal.
Forward-looking: Good long-term real return expectations
William Bernstein emphasizes that nobody can predict short-term market changes, but history aids us in making some good long-term expectations. In his free ebook “If You Can” , Bernstein estimates the real return for these major assets classes:
- The total U.S. Stock Market: 3.5% / year (real return)
- The total foreign Stock Market: 4.5% / year (real return)
- The total U.S. bond market (mostly Treasuries): 1.4% / yr (real return)
He proposes a 3-fund portfolio evenly divided among these three major asset classes. This would make the return of the portfolio
- The portfolio return would be: 3.1% / year (real return) before any investing costs or fees.
You need to estimate, precisely because you cannot predict the short-term market movements. Nobody can. But you can apply solid judgement about long-term market returns and combine that with what you know about your own risk tolerance.
Example: How much to save monthly to achieve $500,000 (in today’s dollars) for retirement?
In Bernstein’s example, saving and investing $625 from every monthly paycheck for 40 years will grow to the equivalent of about $573,000 in today’s dollars.
Use this calculator to modify the real return if you have a different view of what you can achieve for your long-term investments and verify that your saving rate is enough to achieve your goals.
Your monthly saving is constantly in today’s dollars. That makes it easy. It means that in ten years you’ll be contributing an inflation-adjusted (larger) amount—in that years’s dollars—that would have the equivalent value in today’s dollars. Perhaps in fifteen years, you’ll need to be contributing $900 monthly to be equivalent to contributing $625 per month today.
The value of always thinking about this in today’s dollars is that you can think about the future in terms of today’s buying power. At any time in the future that you review your plan, you’ll naturally be thinking about it in terms of the dollar’s buying power on that day.
Use this calculator with this article: How To Build An All Weather Portfolio.