How to Calculate How Much to Put Into Retirement Savings

by C. Taylor

Investing for your retirement years helps supplement what is normally a reduced income during the later stages of your life. Although it would be nice to deposit a giant, lump-sum amount and let it compound, most people are not afforded this luxury. Instead, you might allocate a monthly contribution to savings, which grows to a certain amount by retirement. This monthly contribution may be calculated from interest rate and the length of time before retirement.

Divide your annual interest rate by the number of compounding periods in a year. This gives you your periodic interest rate. As an example, if your savings account offers 6 percent interest and compounds monthly, you would divide this 0.06 by 12 to get a monthly interest rate of 0.005.

Multiply the number of compounding periods per year by the number of years before retirement. This gives you the number of compounding periods before retirement. In the example, if you are currently 22 years old and wish to retire at 62, then you would multiply 12 times 40 to calculate 480 months before retirement.

Add 1 to the periodic interest rate. In the example, this gives you 1.005.

Raise this number to the power of the number of periods before retirement. In the example, raising 1.005 to the 480th power gives you 10.9575.

Subtract 1 from this number. In the example, this leaves 9.9575.

Divide this number into the periodic interest rate. In the example, 0.005 divided by 9.9575 gives you 0.00050213.

Multiply this figure by the amount you wish to have at retirement. This calculates your monthly contribution to reach that goal. In the example, if you wanted $1 million at retirement, you would multiply $1 million by 0.00050213 to get $502.13 that need be saved each month to be a millionaire at retirement.

Photo Credits