Someone starting out with $ today and adding $ each year will end up with $ after years at an average growth rate of % . If your estimated return was actually 2% higher than your actual return, you'd still end up with $ . If, on the other hand, your estimate was conservative by 2%, you'd amass $ . While you can't perfectly predict or control the return you'll get, you do have one lever: there is a significant trade off between expected return and risk.

About This Calculation

For simplicity, this calculation assumes interest only accrues annually. The values presented are nominal. If you'd like to adjust for expected inflation, just subtract your estimate of future inflation from the 'Expected Growth Rate (%)'. U.S. inflation rates (based on CPI) have recently been around 1%, but historically have been closer to 2% - 3%.

About Investing

Importance of Saving

Everybody knows that you should save money for your future. Many people recommend having an emergency fund that can last at least 6 to 12 months at your current spending levels to handle unexpected events like a job loss or serious illness in the family. In addition, most people today have to save for retirement. Gone are the days of people having a job they work at for 30+ years, retire and then collect a livable pension. These days people change jobs with much more frequently, even jumping across industries sometimes. Sadly, only about half of Americans have even $1,000 in savings. That means there’s a ton of people out there that are counting almost exclusively on Social Security to fund their retirement. According to the Social Security Administration, the average 2016 Social Security payment was just over $1,200 per month. Add in all the talk in Washington about having to eventually cut Social Security benefits and we’ve got quite a few people heading for trouble.

Value of Investments

Now that you’re thoroughly convinced that you should save, the question is, what can you do with the money you save? As it turns out, quite a bit. While no investment is a sure thing and it’s definitely possible to lose money, the odds are on your side, especially if you’re patient. The average return of the S&P 500 (an index based on the 500 largest companies publicly traded on the NYSE or Nasdaq) since its inception in 1928 is about 10%. To put that in perspective, money grown at 10% annually would double every 7 or 8 years. Let’s break that down into 2 hypothetical situations:

1. Suppose Alice saved $1,000 every year from turning 30 years old until the age of 65, for a total of 35 years, investing it in some vehicle that gave her a 10% average annual return over the lifetime of her investment.

2. Suppose Bob saved the exact same amount of money over the exact same timeframe of 35 years, but was more risk averse than Alice and chose to hold it in a savings account bearing only 1% interest each year.

How did these two people make out when they hit retirement age? Both of these people socked away $35,000. The average dollar sat growing in each of their accounts for half the time, 17.5 years (some money was in there the whole 35 years, some was only added at the very end. Everything averages out to half of 35 years = 17.5 years). That means Alice had $35,000 * 1.10 ^ 17.5, or about $185,000 at the age of 65, while Bob ended up with only $35,000 * 1.01 ^ 17.5, or slightly less than $42,000 One would intuitively think that two people saving the same amount of money over the same time range would end up with something pretty close to the same amount of money, but in the above example, Alice’s bank account ended up being worth more than quadruple Bob’s. That’s the power of compounding returns. So why doesn’t everyone always invest all their money in the stock market?

Risk/Reward Trade Off

There is a strong trade off between risk and expected return. As I mentioned earlier, any investment, even bonds and money market funds, carries some risk, however slight. Nobody wants to lose money, and most people don’t like the idea of playing roulette with their retirement savings, so the less risk there is in an investment, the more people are going to like it. Conversely, the more risk an investment carries, the more of an expected return investors will demand. Generally speaking, investors looking at longer time horizons will tend to seek higher returns and accept more risk, since the risk can be mitigated by making many independent investments over many years. Investors with a shorter-termed outlook, such as older folks nearing retirement, generally chose more predictable and conservative investments, since any short term loss could immediately impact their lifestyle or ability to retire on time.

There are many factors to consider when making investment decisions. Among other things, you should think about what you plan to use the money for, how soon you need it, and how comfortable you are with risk. Not saving at all or not saving enough is a very common mistake, but so it not making the right choices with the money you do save. Choosing how much to invest and choosing how to invest can end up being just as important or even more important than choosing how much to save.