It is important to understand that the time value of money works to your advantage. The best time to save is as soon as possible.
- Have you given any thought to when you're going to retire? - Sure, I figure I have about 10 years left until I ride off into the sunset and move onto my next great adventure. - So you have you given any thought to saving for retirement? - Well, I figure that since I've picked a retirement date, I should start saving, so that I might enjoy that retirement. - How much would you like to have when you retire? - Oh, let's say $1,000,000. - 1,000,000, okay. So let's figure out how much you have to start saving today, so you can have $1,000,000 on the day you retire. Now, while we're at it, you have a son named Skyler, right? - That is correct.
- Well, if I recall correctly, you were 30 years old when Skyler was born. So let's do this, let's also figure out how much money Skyler would need to save, starting today, to accumluate $1,000,000 when he retires. - Okay, I have 10 years until I retire. Let's assume that Skyler has 40 years to retirement. How much will we each need to save each month to accumulate $1,000,000? - Okay, we are going to need a financial calculator or a computer spreadsheet to do these calculations. You can't just do this in your head.
- Okay, so, first, we need to pick a long-term interest rate. Let's assume a long-term annual rate of return of 3% or .25% each month. - Okay, the number of monthly periods that you will be saving will be 120. That's 10 years times 12 months per year, 120 months. For Skyler, he'll be saving for 40 years. That's 480 months. - Okay, let's do Skyler first. Using my financial calculator, I'll first clear its memory, so that I can start fresh. - Okay, got it. - I equals .25. - .25.
- And FV or future value equals 1,000,000. - Okay, got it. - Then I push PMT or payment and the result is $1,079.85. In other words, Skyler needs to save $1,079.85 each month for 40 years to accumulate $1,000,000 at the end of the 40th year. - Now, the different ways he accumulates that $1,079.85 each month, that's a topic for another day, that's about savings.
But, at the end of the day, he will need to put away about $1,080 a month to reach his target of $1,000,000 at retirement. - Okay, let's do me. How much must I save each month to get my 1,000,000? - Got the calculator right here. First, I'll clear the calculator, got it all cleared. Then I'll input 120, that's 10 years at 12 months per year. .25 for the interest rate. Let's see, the ending amount, the FV is $1,000,000. You sure it's 1,000,000? $1,000,000 PMT.
Whoa, that's $7,156.08 each month for the next 10 years, so that you can retire with $1,000,000 nest egg. - $7,156 each month? That can't be right. - Trust me, dear brother, it's correct. - How come Skyler only needs to save $1,080 each month and I need to save $7,156? - Because the longer the period of time you invest, the greater interest that accumulates. In Skyler's case, he's going to make 480 payments of about $1,080.
That means Skyler will invest $518,400, but that will accumulate to $1,000,000 at the end of 40 years. Skyler will earn interest of $481,600. - For me, I will make 120 payments of about $7,156 for a total of $858,720. I will only earn, in interest, the difference between that number and 1,000,000, or $141,280. - The lesson: the longer one invests, the longer that investment has to earn interest.
- So if your plan is to save for the future, retirement, a rainy day fund, an extravagant vacation, the earlier you start, the less you need to save. You can let your money do some of the work of saving for you. - So I guess you better get started in saving for retirement. If you want $1,000,000, you better get to work. - Uh, no, I've changed my plans. I think that when I retire, I'll just come over and live in your basement.
Skill Level Beginner
Q: Why can't I earn a Certificate of Completion for this course?
A: We publish a new tutorial or tutorials for this course on a regular basis. We are unable to offer a Certificate of Completion because it is an ever-evolving course that is not designed to be completed. Check back often for new movies.