One of the scariest aspects of saving for retirement is not knowing how much your savings will ultimately grow to. After all, there are numerous factors that will come into play to dictate your eventual savings balance, such as the number of years you give yourself to save, the amount you contribute each year, and the way you invest your savings.
The good news, however, is that if you make a point to save 10% to 20% of your salary from an early age, and you invest your savings wisely, there's a good chance you'll accumulate enough to live a perfectly comfortable lifestyle when you're older. And, if you save for retirement with a tax-advantaged account, like a 401(k), 403(b), 457 plan, or traditional or Roth IRA, your contributions will get to grow tax-deferred or tax-free, thus giving you even more opportunity to amass a sizable nest egg.
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Let your investments do the work
If your goal is to accumulate a pretty substantial nest egg -- heck, let's say $1 million -- in time for retirement, then you really have two choices: You can hold off on saving and sink a large chunk of your salary into a retirement plan later in life, or you can start early and turn a bunch of small, painless contributions into a whopping sum over time. Clearly, it pays to go with the latter, because, frankly, it's a far less intrusive way to save.
If you get in the habit of saving a portion of your salary early on and continue to ramp up your contributions over time, you'll grow your nest egg by putting your money to work for you. It's a concept known as compounding, and it basically means earning interest on interest. When you give yourself a long savings window -- say, 30 or 40 years -- you get several decades to make money on your investments and then reinvest those earnings to grow your balance even more.
Now here's where tax-advantaged retirement plans, like 401(k)s, IRAs, and the like, really offer value. With a regular brokerage account, every time an investment of yours makes money, you'll lose a portion to taxes that will be due for the year in which you realize your associated gain. But if you save with a tax-advantaged plan, you won't pay those taxes year after year. Rather, you'll get to reinvest your earnings in full, thus capitalizing on added growth.
How much will your savings be worth?
It's one thing to talk about compounding in theory, but seeing it in practice paints a much more appealing picture. That's why running some numbers can help you get a handle on how your savings are doing, and to that effect, we have a tool that can help.
* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.
To use this calculator, all you need to do is input the number of years you have until you want to retire, your current and expected income, and your typical return on your savings. Now if you're heavily invested in stocks, you're good to plug in 7% or 8% percent, because that's just below the market's historical average. On the other hand, if your portfolio consists of more conservative investments, that return is going to be considerably lower.
Next, you'll need to indicate how much money you have saved already in either your employer-sponsored retirement plan or your IRA. Keep in mind that it's possible to save for retirement with both types of account. From there, our tool will tell you how much your savings might be worth by the time you retire. Just as importantly, it'll show you how much you'll need to contribute in order to obtain that balance.
Remember, the more time you give yourself to save, the less of your own earnings you'll need to contribute to accumulate the same amount of money. That's why it pays to start saving as early as possible in your career -- even if that means giving up a few of life's luxuries along the way.
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