Your best financial friend
Know Your Numbers
How Much Do I Need To Invest?
Some goals are easy to determine. A roof that you need in approximately ten years will be a specific amount by a specific time. How much you need to contribute depends on your goal and your timeline. In other words, how much do you need to have and when do you need it?
If you start early you won't need to contribute as much to meet your goal due to compounding growth and average stock market returns over a long timeline. Depending on your risk tolerance, you may be able to have a more aggressive portfolio since you will have time to recover from any downturns.
A shorter timeline will mean you need to contribute more to achieve the same result because you won't have as much time in the market. You may also want more conservative investments to reduce the risk of losing money in a market downturn, which will also reduce your returns.
Calculating Your Retirement Plan
How do you determine how much you need to retire? Fidelity suggests the following guideline based on your salary for retirement savings.​
Another rule of thumb is to aim for 25 times your expected retirement income, which is often estimated as 80% of your current salary. Why 25 times your retirement income? Because that is the amount you need to never run out of money if you follow the 4% rule.
The 4%Â Rule
The 4% rule is a guideline based on the Trinity Study, which concluded that an investor with a portfolio consisting of 50% equities (stocks) and 50% fixed income (bonds) was unlikely to run out of money if they withdrew 4% of their portfolio, with inflation added each year, during any 30-year block in stock market history. This analysis included the Great Depression and high inflation periods in the 70s, so you can be confident that your situation is not a unique outlier.
​
You can use the Retirement Income Calculator to see how much you can safely withdraw each year in retirement using the 4% rule. A 3% withdrawal rate is included for more conservative planning and early retirement. After you input your portfolio amount, retirement date, and annual inflation, the calculator also shows your annual income and portfolio balances, assuming a conservative 5% rate of return, so you can estimate how long your money will last.
​
The 4% rule applies only to your portfolio balance and does not take into account social security, pensions, or annuities in the monthly income. Your portfolio may not need to contain 25 times your expected annual income to have the total monthly income you desire in retirement if you have additional income from these sources.
Will My Investment Portfolio Provide Enough Retirement Income?
So how much will you need to have in your portfolio to retire? And how much do you need to contribute to reach that retirement goal? ​You can use the calculators in the following way to figure out these numbers while also considering additional income:
​
-
Figure out your total monthly expenses in retirement. If you are far from retirement and have no idea, then you can estimate 80% of your current income.
-
Subtract any pension, social security, or annuity income from that number. This amount is your portfolio income.
-
Experiment with different portfolio balances in the Retirement Income Calculator until you have a monthly income that matches the portfolio income you calculated in Step 2. This is your target portfolio balance.
-
Figure out how much you need to contribute to your monthly to your retirement account to reach your target portfolio balance using the Investment Contribution Calculator.
Investment Contribution Calculator
You can adjust the rate of return to a higher percentage if you think you will have a more aggressive portfolio (.09-.10) or a lower percentage if your risk tolerance or timeline requires a more conservative portfolio (.05-.06). If you have a pension, social security, or an annuity, you may feel comfortable with a slightly more aggressive portfolio as you can treat these supplements as a substitute for or addition to your fixed income allocation.
​
You can play around with the calculators to determine best and worst-case scenarios by adjusting rates of return, monthly contributions, or portfolio balances to see how different situations might affect your monthly retirement income.
Remember that the returns in the calculator are based on average returns in the market, with individual years performing better and worse than the average. Therefore, the shorter your timeline, the less accurate the result may be due to fluctuating markets.
Empower Retirement Plan
If you are interested in a more complex retirement projection, Empower, formerly known as Personal Capital, has a fantastic free retirement planning tool available as a mobile app or a desktop website. It allows you to link your retirement accounts and modify several variables such as expected expenses, annual contributions, retirement age, social security, spousal contributions, and inflation.
It provides two projections based on average returns and poor returns, indicating your likelihood of success based on the variable you have chosen. One shortfall of the projection is that it does not provide an option for ending social security income due to the death of a spouse. Consequently, if you and your partner have a large age gap, your projection might not be accurate.
​
Now you have everything you need to develop your personalized investment strategy. On the next page, we'll review everything you have learned so you can get started investing!