If you have problems saving for retirement this calculator offers an easy solution – periodic spending. Small, regular payments like your daily fancy coffee at Starbucks, the storage locker fee to hold your junk, and the magazines you don’t read can all fund a secure retirement. Try it yourself and see!
For example, just input $5 daily for coffee at 10% interest for 40 years. You’ll be shocked. Now try 12% – but make sure you are sitting down first. To complete the exercise simply examine all unnecessary periodic spending in your life, plug these expenses into the calculator using your expected remaining lifetime (assume age 100 or 90) as the number of years, add up the totals, and you will discover the simplest, most certain way to save for retirement.
The wake up call this calculator teaches is the true cost of spending is the compounded interest you lost over many years – not the actual money you spent. That is the key principle.
A few things to keep in mind:
- Try using an easy round number like 10% to approximate the long-term historical return from stocks.
- If you invest your savings in paying off high interest debt, you could earn an even better return.
- Be sure to include any sales taxes that might apply when entering expenditure amounts.
- Some items you buy come with additional costs of ownership — such as repair and maintenance costs, operating costs (gas, electricity, etc.), insurance costs, storage costs, etc..
- The calculations do not account for inflation.
- Forgone interest is compounded on a monthly basis and forgone purchases are invested at the end of each spending period.
How To Save For Retirement – Tips
The paternalistic days of retirement planning are dead.
You can’t rely on a company pension or government plan (like Social Security) to take care of you in retirement like your father or grandfather did. The game has changed to self-funding through 401(k)s, IRAs, and personal savings.
You are now solely responsible for your retirement security. Companies and governments have passed the baton to you. Are you ready? Do you know how to save for retirement? Are you you taking the right actions?
The truth is saving for retirement is a lifelong process when it is done right. The earlier you can contribute to your retirement, the more time it has to compound and grow.
But all is not lost if you haven’t begun yet. This quick guide will show you how to save for retirement the easy way and get back on track.
Quit Worrying And Start Planning
For some people, saving for retirement seems an impossible task. The goal is so large it seems insurmountable.
Fortunately, it really isn’t that hard. It all boils down to habits. Every day you make tens or hundreds of financial decisions that either result in savings… or not. Your daily spending habits will literally make or break your retirement security.
So don’t worry about the big numbers. Focus on the small numbers you can actually understand – your daily spending habits. Those small, daily amounts – give sufficient time – will compound and grow into those impossibly large figures that are required by the retirement calculators.
Focus on what you can understand (daily spending) and forget about the part you don’t understand. That is what this calculator helps you do.
How Much Should I Save For Retirement?
Some financial experts suggest saving at least 10%-20% of your income to fund your retirement account. This is just a general rule of thumb. The truth is it really depends on how early you started building your retirement savings and how long you have until retirement.
Rather than use a blind rule of thumb, try preparing a budget showing where your money is going and where you can afford to make cuts without hurting lifestyle. Focus on the big expenses since this is where the most money can be saved, and then focus on periodic spending because those regular costs really add up.
The advantage of this simple retirement savings calculator is it shows you how easy it can be to build a substantial net worth by reducing your periodic spending so you can allocate your extra money to your retirement savings.
The Easiest Way To Save For Retirement
When saving for retirement, there are lots of things that are beyond our control – rising commodity prices, stock market returns, falling interest rates, or the yearly increases in Social Security payments. The one thing you can control, however, is your periodic spending.
- Create a shopping list – Sticking to a list will reduce impulsive buying and help you not forget necessary items, both of which can quickly increase the amount of money spent.
- Start using coupons – Coupons can sometimes be a hassle. However, these small amounts can really add up to serious savings. The more coupons you use, the more money you save.
- Shop smarter at the grocery store – Find cheaper alternatives to those expensive items on your list. Think in terms of value delivered instead of defaulting to automatic decisions based on brand recognition or established shopping patterns. Always ask, “how can I get more value for my money?”
- Keep a list of available discounts – It might be in restaurants, retail shops, etc. You could save a lot if you get in the habit of asking for and using discounts when they’re available.
- Pack your lunch – The money you can save by bringing lunch from home instead of eating out each day can really add up. The same is true with bringing a thermos of coffee instead of buying Starbucks. Making a habit of bringing lunch/coffee to your work place will not only save you a lot money but might also help you improve the quality of what you consume.
- Maintain a single car in the family if possible – Even if your cars are all paid off, the cost of each vehicle is very high. Do you really need two? Could public transportation suffice?
- Reduce your utility consumption and services – Find ways to cut down your mobile phone usage, cable subscriptions, or even your magazine subscriptions. Lower your utility costs by using fans instead of air conditioning. Save on your mobile data plan by using Wi-Fi connections when possible. Reduce your utility bills by turning off all unused lights and appliances.
The Key Principle is Forgone Interest – Not Savings
It’s easy to dismiss all these savings strategies as meaningless. They seem like such small dollars in the whole scheme of things. That is a mistake because it means you are looking at the wrong thing.
It is not how much money you save, but the interest on that money that really matters. The compound interest on those small savings that accumulate over many years is what creates a secure retirement.
It is not the $5 here or the $5 there that matters. It is how the $5 grows to become $100 over a period of years and then $1,000. It’s the forgone interest that matters.
If you aren’t clear then just try this retirement calculator for yourself and prove it. The math doesn’t lie.
How To Save For Retirement – Terms and Definitions:
- Unnecessary Expenditure – the amount of money spent on stuff you don’t really need to be happy or where a better value substitute exists.
- Frequency of Spending – how often the spending occurs.
- Annual Interest Rate – your estimated return on investment.
- Forgone Interest – the amount you would have earned in interest if you invested the amount spent for unnecessary expenditures.
- Investment – capital saved and placed at risk for profit instead of spent on consumption.
Related Retirement Calculators:
- Ultimate Retirement Calculator: It’s called the ultimate retirement calculator because it does everything the others do and a whole lot more.
- Retirement Withdrawal Calculator: How much can I afford to withdraw each month given the retirement savings I have accumulated – both before and after inflation?
- Simple Retirement Savings Calculator: How long will it take me to reach my retirement savings goal given my current savings balance and my monthly deposits? Solves for time.
- Retirement Investment Calculator: How much investment should I make each month to reach my desired retirement savings goal given my current savings balance and expected retirement date? Solves for amount to invest.
- Millionaire Calculator – How To Retire A Millionaire: So you wanna be a millionaire? This fun calculator will tell you when it will happen and what a million dollars will be worth by then after adjusting for inflation.
- 401k Calculator: If I deposit a certain amount in my 401k each month what will it grow to by any future point in time?
- 401(k) Early Withdrawal Calculator: What is the financial cost of taking a distribution from my 401(k) or IRA versus rolling it over into another tax deferred account?
- Taxable vs. Tax Deferred Investment Growth Calculator: How will my future value and investment return differ between taxable and tax deferred investing?
- Interest Calculator – Simple & Compound Interest: Compares simple monthly interest income to long term compound growth for surprising results.
- Roth IRA Calculator: What is the after tax impact of switching from a traditional IRA to a Roth IRA?
- Present Value of Annuity Calculator: What is the present value of a series of equal cash flows to be received in the future?