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So You Want a Million Bucks
Note: You can use any financial calculator to do this problem, but if you want the BEST, you can
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, I covered a 'flawed' posting I saw on the internet about how people should have $1.3 million to draw on when they retire. The math in the post is a real mess, but if we put that aside, we can legitimately answer the question 'how could I get to $1.3 million at retirement?' Let's do that.
If we make an average of $30,000 over 40 years, and save 12.4% of our earnings for that entire span (on a monthly basis), what would our investment return have to be in order for us to end up with $1,300,000? Use End Mode*, even though Begin Mode is more appropriate for this type of question.
* If you don't know what this means, don't worry about it - the calculator uses End Mode by default.
This one is pretty straightforward. The only thing we don't really know is how much we'd be investing every month.
If we make $30,000 per year, that's $30,000 ÷ 12 = $2,500 per month. $2,500 x 12.4% = $310 per month in investment contributions.
Now we're ready to start.
First things first, make sure the calculator is using 12 Payments per Year.
N: 480 (40 years is 40 x 12 = 480 months)
I/YR: (This is what I'm trying to find)
PV: 0 (I start with nothing)
PMT: -310 (I invest $310 every month)
FV: 1,300,000 (I want to end up with $1,300,000)
In order for my $310-per-month investment to grow to $1.3 million, it'll have to earn a return of 8.63%.
That's not a negligible return, but it's not outside the realm of possibility. It's pretty remarkable that when I've only invested a total of $310 x 480 = $148,800, my ending balance is more than a million dollars higher. That's the power of compounding returns!
What do you think? Do you want a $1.3 million nest egg when you retire? If so, what are you doing to get it? If not, what number are you aiming for? Let us know in the comments!