Four ways to plan
- End amount: what your money grows to.
- Contribution: how much to invest each month or year to reach a goal.
- Return: the annual return you'd need to reach a goal with your current plan.
- Starting amount: the lump sum needed today.
You can also raise your contributions each year, which is how most people's saving actually works as income grows.
Choosing a return to assume
Long-run US stock returns have averaged roughly 10% a year before inflation, or about 7% after inflation, but individual years swing widely. Bonds and cash have returned less. Many planners use 5% to 7% for a diversified portfolio. Results here assume a steady average; real markets won't be that smooth.
Example
Starting with $20,000 and adding $500 a month at a 7% average return grows to about $331,162 in 20 years. To reach $500,000 in the same time, you'd need to invest about $832.67 a month.
Frequently asked questions
Does this include fees?
No. Subtract your fund's expense ratio from the return to account for it. A 0.5% fee on a 7% return means entering 6.5%.
Should I use a return before or after inflation?
Use an after-inflation (real) return if you want the result in today's dollars. Use a nominal return to see the actual future balance.