Investing for retirement can be very confusing and stressful. Am I saving enough? Will I retire on time? How much should I be saving a month? Is investing $500 a month enough? Today I will go over the numbers to see if allocating $500 a month will give you what you need from your retirement on.
Now, if you are investing $500 a month, starting when you begin your life in the workforce, at let’s say 23 years old, you are putting yourself at a great advantage. One of the themes that we see time and time again is people waiting far too long to set aside any contributions to their 401k in their youth. Even if they know their company will match part of their contribution. So, first things first is to see how much your company is willing to match, and then maximizing that amount. But, outside of this let’s take a look at the $500 mark.
Here’s how I am putting together my analysis: Between the time you are 23 and 65, there are 42 years. You are investing $500 a month into either an investment account (401k) or otherwise (investment portfolio). The average return for the S&P index is 7%, so we are going to break 7% down into 12 periods (12 contributions per year). This gives us 504 periods you will be investing $500.
From the first period, til the last period, your total investments of just $500 a month will grow into $1.522 million dollars. Now, whether that is enough money for your retirement obviously depends on how you plan on living during your golden years. Let’s look at a couple other scenarios to see if there is any room for improvement.
Investing 50% more per month, or $750 will get you to $2.283 million by the time you are 65. Obviously, an improvement of 50%, all things considered. And if you are able to pack away $1,000 a month, you will make it to 65 with $3.043 million. A 100% increase.
Now, $1,000 a month is no small feat if you are in a low paying job and unable to really save the way you’d like to. But be aware that there are catch up provisions in saving within your 401k, where, when you are 50 you can increase the amount you are legally allowed to contribute into a 401k.
All things said and done, investing $500 a month will put you on a great track to having a sublime retirement.