*3/13/2020 Update*: **I am now recommending that you first click on each of the References at the end of this article to review several free online calculators. They are reliable and well explained!**

*Original post:* Young people have limited resources for investing money. But they can still invest if they make a realistic plan. Simply click on this link, investment returns, to download a calculator that will help plan a retirement savings program. The calculator predicts several possible outcomes from investing for 50 years. Here are four examples of how the calculator works for different investment plans:

## Jackpot Plan

Suppose you receive a $50,000 Jackpot. After paying taxes you have $39,600 to invest in a stock index fund with the trading symbol **YAY**. Assume that **YAY**’s annual rate of return is 8%, the stock broker charges a $10 trading fee, the fund manager charges an annual management fee of 1%, and the inflation rate is 2%. Also assume that you don’t plan to make additional payments and don’t have a job that pays an annual salary. You make the following entries in the calculator:

[COMMENTS ABOUT DATA ENTRY: The calculator always assumes that you start investing at an early age and then plan to hold the investment for 50 years; otherwise, no results are displayed. The white cells contain comments and suggested values; place your cursor over the cell to read the comment, then click on the cell to enter data.**]**

** **The results are displayed next to the cells where you enter data. In this example, the calculator uses the 8% annual rate of return to compound your investment returns from the stock market for the next 50 years resulting in an accumulated market value of $1,166,204. **The calculator assumes that you automatically reinvest all dividends and other cash payments earned from the market. The “accumulated market value” will be your retirement savings.** You gave the Jackpot money ($39,600) to a stock broker and he took $10 of the money to pay the cost of trading. That left a principal amount of $39,500 to invest in **YAY**. The calculator subtracted the principal from the accumulated market value to determine the total return.** The total return is how much money you can expect to earn (or lose) from your investment**. In this case, you could earn a total return of $1,126,614 from **YAY**. **The 2% inflation rate will reduce the purchasing power of your retirement savings **[e.g., if your favorite book costs $10 today and $20 tomorrow, then tomorrow’s purchasing power = 100*(($10/$20)-1) = -50%; today’s dollar will only be worth 50 cents tomorrow].

SURPRISE! You can expect to become a millionaire in 50 years, but that nasty inflation will reduce the purchasing power of your retirement savings by -61% to $453,994.

An additional chart is displayed on the graphs worksheet to show the expected growth of your Jackpot during 50 years of compounding the returns:

## Dollar Cost Averaging Plan

A generous uncle wants to help you invest in **YAY** by contributing $2,500 every year until you can continue the additional payments. A $10 trading fee is taken from each payment and **YAY**’s manager charges an annual 1% management fee. You make the following entries in the calculator:

[COMMENTS: The calculator assumes that you, or your uncle, will pay the stock broker $2,500 at the beginning of every year for 50 years. At this time, you do not plan to set up an allotment from your future salary.]

The calculator automatically constructs three Regular Payment Plans depending on whether you pay $2,500 at the beginning of every year, every quarter (a quarter is 3 successive months), or every month. Since your uncle offered to pay every year, we will focus on results from the yearly payments. The total payment ($127,500) is the sum of the initial payment and 50 additional payments. The total trading cost, which is the sum of 51 trading fees, reduces the total payment to a principal amount of $126,990. You can expect the compounded returns to generate a retirement savings of $1,156,463 based on the sum of the $126,990 principal and $1,029,473 total return.

SURPRISES!

- Compared to the single payment plan of investing a Jackpot, the dollar cost averaging of yearly payments is expected to increase the purchasing power of your retirement savings; that’s a good deal! [Inflation reduces the purchasing power of your retirement savings by -50% when making regular payments (better!) compared to -61% when only making one payment (worse!).]
- Look at the fantastic growth of retirement savings by making the same payment on a monthly or quarterly basis!

## Salary Allotment Plan

Not everyone hits the Jackpot or has a rich uncle. But anybody who gets a good education can plan on getting a job at some time in their life. Let’s assume that you save $100 a year from your allowance to invest in **YAY**. Fifteen years later you start earning $65,000 per year and invest 10% of it. You make the following entries in the calculator:

[COMMENT: The calculator assumes that you make the first payment at an early age (e.g., age 10 years) and begin earning wages 15 years later (e.g., age 25 years).]

Your salary allotment plan predicts $1,061,559 of retirement savings. Inflation reduces the purchasing power of the retirement savings by -37% (best!) when making salary allotments compared to -50% (second best!) when making regular payments and -61% (worst!) when making only the first payment. Here’s what happens to salary allotments during 50 years of compounding returns:

## Thrifty Investing Plan

Two ways of reducing the total cost of investment are to purchase a no-fee index fund that charges a low management fee. Some discount brokerage firms don’t charge a trading fee for investing in their sponsored index funds. Some index fund managers charge a very low 0.06%-0.08% annual fee for stock funds that invest in a broad-market index (e.g., Standard & Poor’s 500 Index). Assume that you repeat the same money management plan that was previously used in the Yearly Salary Allotment Plan, but this time you reduce the costs of trading and management. You make the following entries in the calculator:

This thriftier investing plan should increase your retirement savings compared to the more expensive yearly salary allotment plan. The reduced costs of investment predict a good improvement in total return without significantly changing the purchasing power (-38% in this example).

NO SURPRISE! Thrifty investing can increase your retirement savings [by $271,871 in this example].

## Summary

Unless young investors have a lot of money, they will probably invest small amounts during their formative years until they get a job in adulthood. They should still make small investments as early as possible if for no other reason than to start acquiring the skills of money management and investing. Regularly scheduled investments throughout life are essential to maintaining the purchasing power of retirement savings. This investment returns calculator helps young investors (and their parents) plan for retirement.

**Copyright © 2013 Douglas R. Knight **

## Links to previously published calculators of compound returns

Previously published calculators predict the long-time return from an initial investment** ^{1}**, a series of annual investments

**, a series of monthly investments**

^{2}**, or a mutual fund**

^{3}**.**

^{4}1. Dividend.com: http://www.dividend.com/tools/compounding-returns-calculator.php (calculates growth of initial investment)

2. Moneychimp.com: http://www.moneychimp.com/calculator/compound_interest_calculator.htm (calculates growth of initial investment and annual additions)

3. Math.com: http://www.math.com/students/calculators/source/compound.htm (calculates growth of initial investment and monthly additions)

4. SEC mutual fund calculator: http://www.sec.gov/investor/tools/mfcc/get-started.htm (calculates growth of investment after deduction of various fees)