Specific Savings Goals

Up to this point you’ve completed tasks that asked you to increase your long-term savings in a generalized way (e.g. guidance like “10-15%” of your pre-tax income or “as much as you can”). 

But based on everything you’ve already accomplished with your financial priorities, it’s time to see exactly where you stand, and what you need to contribute to hit your goal by a given age. For those of you who already use the MoneySwell Retirement Planner, all you need to do is update your annual retirement savings goals such that at least your “Target” savings goal gets you to your minimum Nest Egg Need number by your goal retirement age. You can check this by scrolling down to your goal retirement age in the Future Outlook section.

If you’re interested to see how you could do this same exercise without using the MoneySwell Retirement Planner, follow the steps below.

1. Select Your Nest Egg Goal Number: In an earlier task you calculated your optimal nest egg number using three different methodologies: the 4% Withdrawal Rule, the Income Multiplier Method, and the Annual Spending Method. You can either choose one of these numbers based on the one you think is the most likely to meet your retirement needs, or if you’re not sure, you can take the average all three numbers.
2. Use the Compound Interest Calculator: This compound interest calculator requires the following variables:
   • Initial Investment: Enter whatever your existing invested retirement savings are today.
   • Monthly Contribution: For the moment, enter whatever you are currently contributing. But, we’ll come back to this number later.
   • Length of Time in Years: Enter the number of years between now and when you hope to retire. For example if you’re 35 and you hope to retire at 65, enter 30. 
   • Estimated Interest Rate: For simplicity, we’re going to tell you to enter a number between 6% and 10%. But see the notes below to determine what is the best number for you. 
   • Interest Rate Variance Range: This is optional. But if you enter a number, it will show you results that are based on an interest rate that much higher and lower than your base rate. For example, if you enter 2%, and your base rate is 7%, it will show you results based on an interest rate of 5% and 9% (2% below and above base rate).
   • Compound Frequency: Set this to “Annually” since the interest rates we’re suggesting are loosely based on historical annual rates of return.
3. Calculate: Once you’ve entered your variables, click “Calculate.”
4. Future Value: Look at the calculated Future Value in the Total Savings chart. Compare this number to your Nest Egg Goal Number.
   
5. Adjust Monthly Contribution Number: If the future value of your savings is already higher than your Nest Egg Goal number, fantastic! You can either retire earlier or save less. However if it is lower, adjust the monthly savings number upward until the calculated future savings number is approximately equal to your Nest Egg Goal number. You now know precisely how much you should be saving each month. Write this number down in the notes section above.
   
6. Increase Your Savings Rate: Whether it’s by upping the percentage taken out of your paychecks, or increasing the dollar amount of your automatic investing, make these changes in the appropriate places and check this task off your list!

Note on Feasibility & Adjustments

If it seems unrealistic to achieve this number, you can either wait to complete this task when it is more feasible for you (either because you have increased your income or decreased your expenses). Alternatively, you can increase your expected age of retirement. This will give your assets more time to grow to your desired nest egg number.

Notes on “Estimated Interest Rate” & Accounting for Inflation

One way or another, you need to account for inflation. You can either do this on the “inputs side” (i.e. by inflating your income and expenses) or the “outputs side” (i.e. by adjusting the rate of return that will determine the estimated growth in your assets). But importantly you shouldn’t account for inflation on both sides of the equation. Therefore:

• If you calculated your nest egg numbers in today’s dollars – i.e. you calculated it using your current income or current expenses etc. – you’ll want to use an inflation-adjusted interest rate of return, typically between 6-7%.
• If you calculated your nest egg number using inflation adjusted dollars – i.e. you assumed a certain amount of inflation and bumped up your salary and expenses based on what you assume they will be in the future – you’ll want to use a non-inflation-adjusted interest rate of return – we’ll suggest between 8-10%.

Historical Perspectives on Rates of Return

• The historical numbers below are based on the average, annualized rate of return for the S&P 500 Index for the 46 year period from January 1975 (the year the first index fund was created) through January 2023 and assumes dividends were reinvested. Try the calculator out for yourself.
• Inflation Adjusted Rate of Return: 7.7% 
• Non-inflation Adjusted Rate of Return: 11.7%

While the rates above are accurate, since most people do not have 100% of their portfolio, for 100% of the time, invested in stocks (which is what the S&P 500 index fund is made up of), achieving these historical return rates is seen as overly optimistic. Add in the fact that historical averages don’t necessarily predict the future, and it quickly becomes clear why it’s better to be a little more conservative in one’s estimates.