How to understand what your investments could be worth?
Investments are no more an option; they are a necessity. Investing helps you cope with inflation while giving you the standard of living you hope for when you retire.
Another advantage of investing (long-term) is that it gives you some tax relief. This means some of the money that would have gone to the government as tax goes into your pension instead.
But, a lot of people don’t know whether their investment would be enough for them after their retirement. In fact, 61% of Americans don’t know how much they’ll need to save to fund their retirement.
Here are two ways to understand what your investments could be worth after some years.
1 – Use a free calculators or tools
There are a number of popular investment accounts in North America with 401ks, IRAs and RRSPs being some of the most popular.
One of the best ways to predict what your investment might be worth is to plug in some numbers to an RRSP calculator (or a 401k/IRA calculator in the US).
All you need to do is enter your age, pre-tax income, current savings, and ongoing contributions. These tools work in similar ways; automatically calculating the amount you’ll could have when you retire. It’s a prediction that’s based on your inputs and a series of assumptions that can be a good guide to see if you are on track.
An RRSP or 401k calculator will help you understand how much you need to contribute to achieve your savings goal within your desired time period.
2 – Calculate It on Your Own
This is a little tricky and time-taking process. But it can be very effective in calculating the worth of your investment. Here’s how to do it.
- Begin by analyzing the investments you’ve made to date.
- Define the time period over which you want to calculate your returns (the number of years you’re going to invest). For instance, if you’re 30 now and you are likely to contribute till 65, then the time period will be 35 years.
- Check your ongoing contributions (how much you’re investing per year).
- Check the expected return rate.
- Calculate the annual return.
- Add the annual return with the projected income of the next year.
Let’s understand this with an example. I have $5000 in my retirement savings account (as of today), which gives me an annual return rate of 4%. I invest $500 every month ($6000 per year).
My age is 30 years, and I will continue to invest until I’m 60 years old.
At the end of the first year (i.e., when I am 31 years old), I will have $11,440 in my account. How? $5000 (current balance) + $6000 (investment) = $11,000 + 4% interest = $11,440.
Similarly, in the second year, I will have $18,137 ($11,440 + $6000 = $17,440 + 4% interest).
In the third year, I will have $25,103.
At the end of the 30th year (i.e., when I’m 60 years old), I will have $374,249.
Determining How Much Additional Contribution Is Needed
Now that you have an estimate of how much your investment could be worth when you retire, it’s time to determine the additional contribution needed. After all, you are calculating your investment’s worth to find whether you’re prepared for your retirement or not.
Continuing the above example.
I am to save $500,000 for my retirement. But as per my calculation, it will be $374,249.
Subtracting the expected amount from the required retirement corpus.
$500,000 – $374,249 = $125,751
So, I need to save an additional $125,751 in 30 years, which means an extra $4191.7 per year (I have simply divided the amount by the number of years without considering the return rate % to make the calculation easier, so the actual amount may differ).
Remember, the actual number will differ based on how much you are investing per month or year and the annual return rate.
Understanding the worth of your investments helps in preparing for your future. If the value is lower than what you’ll need, you must increase the investment.
While the best way to calculate it is by using one of the many free calculators and tools available in the United States or Canada, you can still calculate it on your own as explained above.