04/ How much do you need to invest each month?
Once you know how much you need to save up from "Step 03/ How much you need to save up," and you have made your calculations and adjustments and you have written down that amount on a piece of paper, you now need to figure out the amount you will need to invest each month in order to reach your goal of having the amount of money you will need to have upon the first day of your retirement.
Fortunately, the federal government's U.S. Securities and Exchange Commission has provided this Savings Goal Calculator [external site] to help us know how much we need to set aside each month. Here are some handy notes you can use to help you know what number to plug into what field:
NOTES ON SAVINGS GOAL CALCULATOR: For "Step One: Savings Goal," put down the number you have worked out in 03/ and written on a piece of paper. For "Step 2: Initial Investment," if you do not have any savings to invest at this time, just put down $1 as the amount of your initial investment. For the "Step 3: Growth Over Time," if you plan to retire at age 65, simply subtract your age from 65 and enter the result. For instance, if you are 22, 65 minus 22 is 43. Put in 43. For "Step 4: Interest Rate," put down 14%. Hopefully the actual rate of return on your investment will be greater than 14%, but it is better to use a relatively conservative estimate. For "Step 5: Compound It" select "annually."
When you press the red "CALCULATE" button, the page will tell you how much you will need to save each month in order to achieve your goal.
Think of this money you will be investing each month as a car payment you will keep paying every month until your first day of retirement. The younger you are and/or the less the amount of money you are trying to save is, the more affordable the car payment will be. The older you are and/or the greater the amount of the money you are trying to save is, the more expensive your payment will be. The younger you start investing the better. When you start young enough--or you are trying to save a relatively modest amount--you will be paying the equivalent of a Kia car payment each month--or less. If you start older or you want to have a lot of money when you retire, it might feel like you are paying for a Mercedez or even a Ferrari just to reach the same goal as a younger person.
If you have savings and you want to use them to fund your retirement, you can make an initial investment in your retirement account. The Savings Goal Calculator allows you to put in the amount of your initial investment in "Step 2: Initial Investment." Making a big initial investment when you are young can be a very powerful way to achieve your goals.
Here is an example of the benefit of making a big initial payment towards your retirement. A lot of teenagers take a summer job in order to buy a car. Let's say a 16-year-old named Beth saved up $10,000 but, instead of buying a car, she put it towards her retirement. Lets say that, because of inflation, Beth decided that she would need $7,000,000 in her retirement. If Beth used that $10,000 to fund her retirement (at age 16), she would only need to make monthly payments of $16.32 from age 16 to age 65 (assuming an annual rate of return of 14%) in order to save up $7,000,000. However, if she used that $10,000 instead to buy a car, she would have to make monthly payments of $133.16 in order to reach $7,000,000 by age 65.
This shows the power of starting to invest when you are young. Beth discovered that a $10,000 investment at age 16 will yield $6,142,395 over the course of 49 years if it gets an annual rate of return of 14%! But a 40-year old named Susan would only be able to save up $264,619 by age 65 from a $10,000 investment at a return rate of 14%. This ability to save up so much money over longer periods of time is due to the power of compounding which has been referred to as the 8th Wonder of the World!
Every bit you can put towards your retirement now has the potential of becoming something big, especially when you are young. Waiting until you are close to retirement age to plan for your retirement makes the job extremeley difficult. Let us say Brian is 60 years old and wants $1,000,000 when he retires at age 65. Brian would need to come up with $12,607 a month (assuming a 14% rate of return). That number--$12,607--is more like one or more very expensive mortgage payments than a single car payment.
So, the lesson is, start investing early and put in as much money up front as possible!