Retire Early -- Safe Contribution Calculator

This article was first posted November 1, 2000.

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With the recent "unpleasantness" in the stock market, many nervous youngsters are asking, "What if I don't get a 10% return? Will I ever retire?" To help answer that question, Retire Early used the stock market database compiled by Yale University Prof. Robert Shiller to create a spreadsheet that will tell you how much your money will grow under the worst of circumstances.

For example, the worst 20-Year compounded annual return for the S&P500 index is 3.30% per annum. Contributing $2,000 to an IRA on Jan 1st of each year for 20 years would return $57,240 at the end of the 20-Year period. Unfortunately, even in the worst of times, you won't get exactly a 3.30% return each year. The table below shows the distribution of the actual terminal values for 110 20-Year holding periods from 1871 to 2000. The minimum value, $53,901, is a bit below the $57,240 you get with a constant 3.30% average annual return.

Download Free Software

The Millennium Edition -- Safe Contribution Calculator can be downloaded to your hard drive. You need Excel 95 or a later version of the program to use the spreadsheet.

User Instructions.

The Safe Contribution Calculator spreadsheet is shown below (Figure 1.). There are only 9 input parameters that the user must define in the left hand column of the spreadsheet. Each of the 9 parameters are explained in detail below Figure 1.

You may want to print this page so that you can refer to these instructions while you work with the retirement planning spreadsheet.

Input parameters.

Initial Account Balance Input the current value of your retirement accounts.

Accumulation Period Select the length of time you expect to work before you retire. (Choices are in 10-Year increments.)

Stock Allocation Enter the percentage of your portfolio allocated to stocks. The balance of the portfolio is invested in fixed income securities to bring the total to 100%

Fixed Income Series Only selections 1 "commercial paper" and 4 "TIPS" have data series for the whole 1871-2000 period.

TIPS Coupon This is the yield on the 30-Year US Treasury Inflation Protected Security (TIPS). You can find this in the current issue of the Wall Street Journal or many other financial publications.

Initial Annual Contrib. Enter the amount of money you expect to contribute to your retirement accounts the first year.

Annual Contrib. Increase In practice, many people increase their retirement contributions as their salaries rise. Enter the percentage increase here. If you want to maintain the level of contributions set in the first year, enter "0".

Investment Expenses (% of assets) You should strive to keep this number as low as possible. Vanguard's S&P500 index fund has an expense ratio of 0.17%. For more on investment expenses see the article "Are Your Mutual Fund Fees So High You Can't Retire?"

Rebalance Portfolio?If you have a mix of both stock and fixed income securities, you should rebalance. Otherwise, the portfolio will become more heavily weighted towards stocks over time.

Let's look at a real life example

Problem: Jack and Jill Smith amassed a $1 million nest egg by age 40. They'd like to retire in 10 years at age 50 with $2 million. How much money must they save each year to be "100% sure" they'll have $2 million in 10 years? How about "90% sure" and "75% sure"?

For simplicity, assume the Smith's have the entire portfolio invested in an S&P500 index fund and that they will not increase their annual contribution beyond the initial level.

Answer: Using the Safe Contribution Calculator, enter $1,000,000 as the "Initial Account Balance, a "1" as the "Accumulation Period", "100%" as the "Stock Allocation", :0% for "Annual Contrib. Increase", and "0.20%" for "Investment Expenses". Next, you'll have to do some trial and error. Vary the "Initial Annual Contribution" until the "Min Terminal Value" of the portfolio equals about $2 million. An Initial Annual Contribution of $89,500 results in a Minimum terminal value of $2,000,226. This is the "100% sure" annual contribution.

To find the "90% sure" contribution level, vary the "Initial Annual Contribution" until the 10% Terminal Value equals close to $2 million. (The 10th percentile (i.e. "10%") Terminal Value means that 90% of the time the Terminal Value is greater.) An Initial Annual Contribution of $52,600 results in a "10%" Terminal Value of $2,000,549.

Using the same trial and error procedure to find the "75% sure" level reveals that an initial contribution of $20,050 per year results in a 25th percentile Terminal Value of $2,000,563. The Table below summarizes the results for the Smith's.

Run some scenarios.

The Safe Contribution Calculator allows you to input different parameters and see the results immediately. Use your imagination. The good news is that if you decide to use the "75% safe" savings rate to reach your retirement goal, there is a 75% chance you reach it faster than expected.

Hope you're able to Retire Early real soon.