The question today is, how much do I need to save each year to have $875,000 in savings when I retire? The answer of course depends on how long you have to save. I will give three examples, 10 years, 20 years, and 40 years. These would correspond to late career, mid-career, and start of a career.
Again, we will assume that you can earn a return of 8% on your savings. Using my trusty financial calculator we put $875,000 in the Future Value bucket, 10 years in the period bucket and 8% in the interest bucket. We solve for payments and get $60,400 per year. Moving to 20 years you get $19,121. Finally, if you have 40 years, you only need to save $3,378 per year.
As you can see, time is your friend. The more time you have, the more compounding works for you. As you can also see, most people are not saving enough. It requires discipline to curtail current consumption to ensure sufficient savings for future needs. So, get on the stick and do it!
In the next post, I'll talk about tax advantaged retirement savings plans.
THE POWER OF COMPOUND INTEREST:
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Build Up Your Savings While Having Fun!
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On their wedding night, the young bride approached her new husband and asked for $20.00 for their first lovemaking encounter.
In his highly aroused state, her husband readily agreed.
This scenario was repeated each time they made love, for more than 30 years, with him thinking that it was a very cute way for her to afford new clothes and other incidentals that she needed.
Arriving home around noon one day, she was surprised to find her husband in a very depressed and drunken state.
During the next few minutes, he explained that his employer was going through a process of corporate downsizing, and he had been let go.
It was unlikely that, at the age of 59, he'd be able to find another position that paid anywhere near what he'd previously been earning, and therefore, they were on the verge of financial ruin.
Calmly, his wife handed him a bank book which showed more than thirty years of steady deposits and interest totaling nearly $1 million.
Then she showed him certificates of deposits issued by the bank which were worth over $2 million, and informed him that they were one of the largest depositors in the bank.
She explained that for the more than three decades she had "charged" him for sex, that these holdings had multiplied, and these were the results of her diligent savings and investments.
Faced with evidence of cash and investments worth over $3 million, her husband was so astounded he could barely speak; but, finally he found his voice and blurted out, "If I'd had any idea what you were really doing during all that time, I would have given you ALL of my business!"
That's when she shot him. Sometimes, men just don't know when to keep their mouths shut.
Posted by: Bob Hansell | May 9, 2006 6:04 PM | Permalink to Comment