There are two key financial tables that can help you plan for retirement. They can be found on the Internet. With them you can input two simple factors—period invested and interest rate earned—and quickly see how your net worth is affected.
Table 1, Future Value of One Dollar, calculates the value of a dollar at the end of “X” years earning an interest rate of “Y” compounded annually.
Say you want to find what $1 will be worth at the end of 12 years earning 6 percent a year. The table lists periods 1 to 50 in rows down the left side and interest rates of 1 percent to 50 percent in columns across the top. Cross-reference the 12-period row and 6-percent interest rate column and the table provides a figure of 2.012, or in money terms, $2.012.
Simply multiply $2.012 times any beginning amount to calculate the ending value after 12 years compounded at 6 percent: $100,000 grows to $201,200, and $63,450 grows to $127,661 (63,450 times 2.012), etc.
Scan the table and you will see it is useful in providing “what if” scenarios for various interest rates and years invested. A $25,000 investment earning 8 percent over 20 years returns $116,525 ($25,000 times 4.661). Bump up the return and time period and the value of $1 compounded at 12 percent over 30 years grows to $29.96, or a $25,000 investment would grow to $749,000.
Table 2, Future Value of an Annuity, is helpful to the investor who is still saving money for retirement. The results in this table tell us the future value of $1 invested annually (at year-end) for “X” periods at “Y” interest rate.
So, if we were to invest $1 annually for 17 years (a total of $17) and earn 10-percent compounded annually—cross-reference the column (period) and row (rate) on this table—we would end up with $40.544. Therefore, investing, say, $15,000 each year for 17 years ($255,000 total) at a 10-percent annual return, grows to $608,160.
For those who are diligent about saving and investing, playing with the numbers in these tables drives home the power of compounding money at high rates of return over a long time period. When Warren Buffett returned to Omaha after college in New York, he had $127,000 and told his wife that compound interest guaranteed he would be rich.
Say you are 45 years old. Take your current investment balance and use Table 1 to compute a future value at a given rate of return 20 years from now. Then determine the annual amount you plan to save and invest each year and use Table 2 to determine the future value of those contributions. Add the two results together for your ending balance at age 65.
Then, think of yourself as a private endowment that must distribute 5 percent of your final fund balance each year for your living expenses. If that annual distribution is insufficient, you will need to increase either your annual contribution, or your investment return, or both. Then return to the tables to recalculate.
Don’t let these tables intimidate you; they are quite simple to use. Make a good copy, laminate them, and put them in your personal finances file.•
Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or email@example.com.