Where Will Your Retirement Savings Be 10 Years from Now? – Motley Fool

Posted: August 23, 2020 at 10:58 pm


without comments

You might know where you'll live in 10 years and have a pretty good idea of the job you'll have, but could you predict the balance in your retirement savings? If the answer is no, you're not alone. Many American savers aren't even sure how much moneythey'll need to retire -- let alone forecasting their progress along the way.

Having the ability to project your retirement savings growth is a useful skill, because it allows you to recognize and fix contribution shortfalls proactively. The alternative is watching that account balance and waiting for the growth. You might set goals for yourself, such as amassing $500,000 by your 40th birthday. But you won't really know if you're on track until it's too late to adjust your strategy.

Image source: Getty Images.

The good news is that you can easily learn how to project your investment growth confidently. Here's what you need to know.

Your future retirement balance is a function of your balance today, future contributions from you and your employer, your rate of return, and the timeline. If you know these values, you can plug them into a compound interest calculator for a quick gauge of where your balance will be at some future date. It seems simple enough, right up until you have to predict your rate of return. That's the tricky part, because it depends on how your money is invested and what's happening in the financial markets. There's also inflation to consider, which reduces your returns by shrinking the buying power of your money.

For projections of at least 10 years, you can use long-term historic averages in your calculation. If you've ever read a mutual fund prospectus -- and hopefully you have -- you know that historic returns are no guarantee for future results. But they are a better choice for projections than, say, a hopeful guess or a reading from a crystal ball.

So, what are those averages? Inflation has been running quite low in recent years, but the long-term average is 3% annually. The S&P 500 has historically grown about 10% annually. Net those two numbers and you get an inflation-adjusted, average annual return of 7% for large-cap stocks.

You can't just pop 7% into your investment calculator and call it a day, however. You might need to adjust that percentage down based on how you are invested. If your portfolio is comprised of 50% stocks and 40% bonds, for example, your rate assumption should consider that the long-term average of government bonds is lower than stocks, at about 5.5% before inflation. That puts your overall return closer to 5%.

On the other hand, you could also expect high growth rates because you're invested in some aggressive small- and mid-caps or leveraged funds. Know that it's risky to raise your expected return in that case, because those high-growth positions are also more volatile. You could make more on them, or you could make less.

As you start running the numbers, there are a few projection pitfalls to avoid. One is being too optimistic on your rate of return. If you're unsure, use 6% as a conservative starting point. Another pitfall involves your employer matching contributions in your 401k. You can't take those contributions with you if you leave your job and you're not fully vested. If you aren't sure of your future with your employer, don't include unvested contributions in your calculation.

It's also inappropriate to assume your projection predicts the future exactly. The unfortunate side of investing is that the market can be erratic. That's why it's less useful to project investment growth for durations shorter than 10 years -- there's just too much volatility from year to year. If you were investing back in 2008 and 2009, for example, you know that results in a single year can be wildly different from that 7% average. Even in a 10-year window, you might be on pace to reach your goal when a crash in the ninth year suddenly stunts your progress. Always recognize that as a possibility.

Use projections from an investment calculator to evaluate your annual contribution relative to your goals. Say you are contributing $6,000 annually and you expect a 7% return after inflation. Given those variables, you should have $88,702 after 10 years. If your 10-year goal is $250,000, you know you're not going to get there unless you can increase your contributions substantially. You can do that from the get-go, or plan on raising your contributions gradually over time. This calculator lets you test both options.

While that may not be the news you want, at least you know where you stand. It'd be a much harder problem to solve if you didn't realize until year five or six that you weren't contributing enough. And if you haven't even set a 10-year goal yet, at least use your newfound knowledge to find out where you want your retirement savings to be in 10 years.

More:
Where Will Your Retirement Savings Be 10 Years from Now? - Motley Fool

Related Post

Written by admin |

August 23rd, 2020 at 10:58 pm

Posted in Retirement