Planning for Your Future: How the Retirement Calculator Works
Retirement planning is one of the most critical financial tasks you'll undertake. Our Retirement Calculator is designed to give you a high-level estimate of whether you are on track to meet your retirement goals. By inputting your current age, desired retirement age, current savings, contribution rate, and expected investment returns, you can project the future value of your retirement portfolio.
The Core Formula: Future Value of a Series
The calculator uses the "Future Value of a Series" formula to project the growth of your regular contributions, and the standard compound interest formula for your current savings.
Growth of Current Savings
Your existing savings grow based on the standard compound interest formula:
FV_current = P * (1 + r)^n- FV_current is the future value of your current savings.
- P is your current savings principal.
- r is the annual interest rate of return.
- n is the number of years until retirement.
Growth of Future Contributions
The total value of your future monthly contributions is calculated using the future value of an annuity formula:
FV_contributions = C * [((1 + r_m)^n_m - 1) / r_m]- FV_contributions is the future value of all your contributions.
- C is your monthly contribution amount.
- r_m is the monthly rate of return (annual rate / 12).
- n_m is the total number of monthly contributions (years until retirement * 12).
Your total estimated retirement savings is the sum of these two future values: Total Savings = FV_current + FV_contributions.
Practical Example
Let's consider a 30-year-old who wants to retire at 65.
- Current Age: 30
- Retirement Age: 65 (so, 35 years to grow)
- Current Savings: $50,000
- Monthly Contribution: $500
- Annual Rate of Return: 7%
1. Growth of Current Savings:
The $50,000 will grow for 35 years. Future Value = $50,000 * (1 + 0.07)^35 ≈ $533,803.
2. Growth of Contributions:
The $500 monthly contributions will be made for 420 months (35 years). The future value of these contributions is ≈ $845,502.
Total Estimated Nest Egg:
$533,803 + $845,502 = $1,379,305.
This shows that consistent contributions and the power of compounding are essential for building a substantial retirement fund.