10 July 2024
By John McConnell
Introduction!
Retirement planning can be daunting, but the key to success lies in understanding the goal: For example, to accumulate one million dollars while earning in order to provide regular income in retirement. While fees and expenses are important, they can often prove to be a distraction from the primary objective. This article will focus on calculating how much you need to save each month to reach one million dollars in retirement savings, depending on when you start saving.
The Power of Compounding Returns
Compounding returns are the cornerstone of long-term investing. They represent the investment earnings on the amounts invested plus the investment earnings on the accumulated investment earnings. The longer your investing time frame, the greater the impact compounding returns will have.
Let’s demonstrate with some scenarios. Assuming an average annual compounding return of 5% after fees and tax, how much do you need to save each month to reach one million dollars by age 65, starting at ages 30, 40, and 50?
Saving at Different Ages
Starting at age 30 [35 years to age 65]
Starting at age 40 [25 years to age 65]
Starting at age 50 [15 years to age 65]
You can see from the data the impact of compounding returns over time. In the first scenario the 30-year-old only needs to contribute 37% of the total to reach $1,000,000 with investment earnings making up the balance, and the contributions are much more manageable than the other two scenarios.
In the second scenario, the 40-year-old needs to contribute around 50% of the total to reach $1,000,000 and the contributions have almost doubled from the first scenario to in excess of $20,000 per year.
In the third scenario, the 50-year-old needs to contribute two thirds of the total amount to reach $1,000,000 and the contributions have soared to nearly $45,000 per year, more than 4 times scenario 1 and double scenario 2. Ouch!
Conclusion
Achieving a one-million-dollar retirement fund is possible with a clear understanding of your financial goals and through disciplined savings. Starting early is the key by letting compounding returns do the heavy lifting.
If you are saving for retirement and want to know if you are on track to achieve your retirement goals, click here to do the National Capital* financial HealthCheck.
* National Capital is a KiwiSaver digital financial advice provider and a wholly owned subsidiary of Saturn Portfolio Management Limited.
Disclaimer:
The information provided is of general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances.
The 5% rate of return is not guaranteed and is for illustration purposes only. In practice, investment returns will vary from year to year