For most of us, retirement will be only as good as we make it. For best results, we should plan, save, and invest -- early, aggressively, and effectively. That can mean the difference between a stressful retirement where you struggle to make ends meet and can't do many things you had dreamed of, and a financially secure retirement full of adventures.
There are a bunch of good rules to follow for those who want to execute a smart retirement plan -- and there's a particularly valuable retirement chart worth examining.
Continue Reading Below
What makes this such a great chart
This retirement chart deserves a drum roll before being unveiled. Here are just a few reasons it's such a great chart:
- It will inspire you to start saving as much as you can for retirement, as soon as you can.
- It can help you see how much you have to put aside each year in order to meet your retirement goal.
- It can help you assess how on-track or off-track you are in your retirement savings.
- It can be applied to other savings goals, too.
- It can help you set financial priorities and make sound decisions.
Without further ado, The Chart:
You can see how much you can amass when socking away various sums regularly over a variety of time spans. The 8% average annual growth rate is used because it's a little more conservative than the stock market's long-term average annual growth rate of close to 10%. That 10% doesn't include inflation, so using a more conservative rate is helpful.
Also, depending on the exact years in which you're saving and investing, your average annual growth rate might be quite different than the longer-term historic one. Just assuming you'll average 10% can be wrong and dangerous.
So what kinds of things does the chart tell us? Well, it shows that you don't need to invest massive sums to build massive sums. If you're 40, without much in retirement savings yet, and you expect to retire around age 70, you might amass around $600,000 with just relatively modest annual investments of $5,000. (Of course, if you can invest more, that would be better -- getting you to a larger nest egg sooner. That can help in case you end up having to retire earlier.)
The chart also shows what can be accomplished if you're able to save aggressively. If you can invest $15,000 annually and you're already 45 years old, you might retire around age 65 with roughly three quarters of a million dollars!
Variations on the most important retirement chart
Therefore, let's take a look at how your money might grow if it averages a higher or lower annual growth rate. The two tables below offer results for a 5% average and a 10% average. Note that with inflation having averaged about 3% over many decades, if you expect to average 8% in the stock market pre-inflation, your results would probably be closer to 5% annual growth, adjusted for inflation. So the first table below could be showing you what you might amass over time -- and its buying power.
The table above shows that even if your money is growing at a somewhat slower clip, you can still accumulate quite a hefty sum -- though it helps either to be setting aside large amounts each year or to be several decades away from retirement. For example, if you're 40 years old and aiming to retire at 65, you have 25 years in which your money can grow. If you can save and invest $10,000 annually, you might end up with around $500,000.
What does that mean for your retirement? Well, you might use the flawed-but-still-useful 4% rule that says you can withdraw 4% of your nest egg in your first year of retirement and adjust further withdrawals for inflation -- in order to have a good chance that it lasts 30 years. It suggests that you might withdraw 4% of $500,000, or $20,000 in your first year. It's not a princely sum, but if you also collect $20,000 from Social Security, it's getting a lot closer to a number someone might live on. (The average Social Security retirement benefit was recently $1,411 per month, or about $17,000 per year. You might well collect more, though, and there are ways to increase your Social Security benefits, too.)
Now let's have more fun, looking at how your money might grow at an annual average rate of 10%:
These numbers are much more thrilling to gaze at than the numbers in the previous 5% growth chart. Note that even though 10% looks like twice as much as 5%, the higher annual growth rate doesn't give you numbers that are twice as big. The smallest numbers on each table are $29,010 and $33,578 -- not that different. But over longer periods, the differences become huge. Socking away $15,000 annually for 40 years will give you roughly $2 million if it grows at 5% but more than $7 million if it grows at 10%.
Using this important retirement chart
This chart should inspire you to save and invest for the long haul -- however long your long haul is. Meaningful sums can be accumulated over relatively short time frames, too.
It can help you get a ballpark idea of how much you need to save each year to reach your goal. Looking for about $400,000 at retirement? Then you need to invest about $5,000 annually for 25 years, or about $15,000 annually for 15 years -- and hope that your annual growth rate averages 8% or more. If you want to be more conservative, invest more each year or plan to keep investing longer.
Finally, while you might be dismayed seeing how much you could have accumulated if you'd started earlier, remember that those sums might still be achieved -- by your children or grandchildren. Teach them to be money-savvy and to start investing for the long run as early as possible, and they might be able to enjoy early, luxurious retirements.
The more you read up on retirement and the sounder your decisions, the more financially secure you'll be. There are lots of ways to enjoy more income in retirement -- and keeping these charts in mind can help you prosper.
The $16,728 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.