Q. I’m 45, and I’ve saved nearly $800,000 in my retirement accounts. It’s invested 80 percent in stocks and 20 percent in fixed income. I’ve heard you can expect to double your investments every seven years if you earn 7 percent a year. Is that accurate? How can I project how much my money will be worth?
— Future planner
A. Congratulations on being such a disciplined saver. With nearly $800,000 in your retirement accounts, you’re well on your way to funding your retirement.
In terms of projecting how long it will take for your portfolio to double, you’re talking about what’s called The Rule of 72.
Simply divide 72 by the annual interest rate you’re earning on your money to get a rough estimate of the number of years it will take to double, said Gene McGovern of McGovern Financial Advisors in Westfield.
For example, he said, if you average a 7 percent return each year, divide 72 by 7 to get 10.3, meaning that your money will double in just over 10 years.
As for projecting how much your money will be worth at any point in the future, such as the date you retire, the first thing you’ll need to do is to make an assumption about your average rate of return over the period in question, McGovern said
For example, with an 80/20 mix of stocks and bonds, you could use historical returns for such a portfolio, which for example Vanguard calculates have averaged 9.5 percent over the 90 years from 1926 to 2016.
“Alternatively, you, could use a forward-looking estimate based on current conditions,” McGovern said. “With today’s relatively high stock valuations and low interest rates, a future estimate of 5 to 7 percent returns may be more appropriate.”
Once you’ve made an assumption about your anticipated rate of return, you need to specify several items: the number of months or years you want to make a projection for, the amount of your existing savings and any monthly or yearly amounts you’ll be contributing to your savings during that time, McGovern said.
Then you can do a simple projection using one of the many available online calculators like this one, or even an app.
Or, you can also do the calculations yourself using a financial calculator or an Excel worksheet, McGovern said.
Of course, we have warnings.
Future projections using long-term averages or assumptions don’t take into account the sequence of returns, McGovern said.
“In any given year, stock and to a lesser extent bond market returns can vary dramatically,” he said. “Despite the long-term averages, a few years of poor returns or losses early on can make a big difference in how much money you accumulate.”
He said financial advisors can do more-sophisticated projections by using software that models hundreds or even thousands of possible return sequences. The result is expressed as a range of possible future outcomes for your savings, with probabilities for each, he said.
“In short, you can quickly estimate how much your money will be worth in the future, but be aware that all such calculations are at best only estimates,” McGovern said.
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