Retirement planning is an important, albeit an often-neglected, part of a person's overall financial plan. Saving for retirement now allows you to gain the benefits of monthly compounding. Many people often think of saving for retirement by determining how much they can contribute each month. However, by working backwards and determining how much you would like to have at retirement will tell you how much you will need to save each month. This is also known as the present value of your money.
Step 1
Determine how much money you would like to retire with in 15 years. Remember to account for inflation, health care expenses, current expenses and life expectancy. For example, you might say that you will need $1,000,000 for retirement in 15 years.
Step 2
Determine the average rate of return you are earning on all of your investments. This may sound like a difficult task, but this information can be easily obtained from a financial advisor or from your 401K statement. If you do not have any investments, it is a good idea to start investing as soon as you can. You can use the average stock market return of 8% if you do not have any investments.
Step 3
Convert your expected rate of return from an annual rate to a monthly rate: 8%/12 = .6666 % monthly. Divide the annual rate of 8% by 12 (the number of months in a year).
Step 4
Determine the number of payments. This is 15 years times 12 monthly payments per year, or 15 x 12 = 180 total payments.
Step 5
Enter the information into a financial calculator. The number of payments is 180. The interest rate is .00666666% monthly. The future value is $1,000,000.
Step 6
Press the payment button to determine your monthly payment required to retire with $1,000,000 in 15 years. In this example the payment is $5,522.47 per month.
Tips and Warnings
- It is important to save for retirement as early as possible. Saving for 30 years reduces the above payment by half to $2,744.67
Things You'll Need
- Financial calculator
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