Part of planning your retirement budget is anticipating what your income needs and your possible income sources are. To do that, you must estimate the growth of what you contribute into your retirement plan, such as 401k. Since most 401k plans are invested in fluctuating mutual funds, calculating your retirement savings is really a best guess scenario.
Investment advisers use what is referred to as the Rule of 72 to estimate growth of assets over long-term periods. The Rule of 72 takes an expected or anticipated return and divides it into the number 72, based on general compounding interest figures. The result is the number of years it would take to double your assets. For example, if you expect an 8 percent annual return in your portfolio, then your money will double every nine years. Of course, this assumes that your portfolio achieves the expected returns.
Using broad estimates is fine to give you an overall understanding of how your portfolio should perform. Assuming you put $10,000 into your 401k with the 8 percent interest rate with another 25 years before retirement, the $10,000 would double 3.125 times in 25 years. In monetary estimates that is $67,500. The problem with this estimate is you don't put $10,000 in once and then not look at it again. You contribute regularly so the estimates need to be adjusted for regular contributions. The future value of an annuity formula is used to determine these estimates.
Future Value of Annuity Computation
The equation for the future value of an annuity is: FV = PMT [((1+i)^n -1)/i]. Each variable is defined as PMT and is the amount of each payment, "i" is the interest anticipated and "n" is the number of periods with "^" representing the "n" is an exponent. Using the $10,000 per year at 8 percent interest for 25 years looks like this: FV = $10,000[((1+0.08)^25 - 1)/0.08]. Your expected retirement assets under this scenario is $731,059.39.
There are many calculators that do the work for you with these estimates. Going to sites such as CNNMoney.com, MSNMoney.com or even regulatory agencies such as the Financial Industry Regulatory Authority. These calculators take the exact amount you put in every year or month and estimate both what you need and expect to earn. These calculators are great tools to fine tune how much you contribute monthly and annually.
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