People often calculate how much money they need to retire and how much money they need to invest each month to reach that goal. It’s pretty easy to know the maximum amount of money you can save and invest each month, and you can estimate with some level of certainty how much money you’ll need for retirement.

What’s missing from these estimates is your *rate of return*. There are many ways to estimate this. Over any 30 year period the S&P 500 has never returned less than 8.11%, and the average over all 30 year periods is 11.17%.

Past performance is never an indicator of future returns, but usually we believe that because the sun has risen every morning in our lives, it’ll rise again tomorrow. We have to start *somewhere *when picking a rate of return on our investments, and depending on what we’re investing in, the best we can do is make educated guesses.

Why don’t we know for certainty what return we’ll get on our money? Most of it comes down to risk and access of your money. When the risk of losing money is very low, the return we get is also very low. When it’s relatively easy to get your cash, the return can also be low. Think about a savings account at a bank. In 2015, a 1.1% return is considered *good*.

If you invested $500 a month with a 1.1% annual return, it would take you around 96 years to have $1,000,000.

This is why folks don’t invest money in a savings account. If you’re willing to lose the ability to access your money quickly, you can invest in a CD. If you’re willing to tie your money up for 5 years, you can earn a rate around 2%. While that’s about 100% more than you’d earn in a savings account, it’s still not all that good.

If you invested $500 a month with a 2% annual return, it would take you around 74 years to have $1,000,000. That’s 22 years sooner than investing in a savings account, but not a high enough return for a secure retirement.

If you’re willing to tie your money up for a longer period of time, though still with little risk, you can purchase US Treasuries. The current 30-year rate on a Treasury is 2.9%. If you invested $500 a month with a 2.9% annual return, it would take you around 62 years to have $1,000,000. That’s 35 years sooner than investing in a savings account and 12 years faster than investing in CDs.

If you’re willing to take more risk, you can invest in other types of bonds. Bonds come in all shapes and sizes, and while they’re generally considered a safe type of investment, the more risk, the more potential reward. That means a government bond will have a lower return than a corporate bond.

Investing in an AAA rated bond for 20 years can provide you with an annual return of 3.374%. If you invested $500 a month with a 3.374% annual return, it would take you around 57 years to have $1,000,000.

The times are getting lower to building your nest egg, but higher returns are available, but with considerably more risk. For example, you can invest directly in a company’s stock. If the company does well, you do well, but if the company does poorly, or goes out of business, you could lose all of your money.

So what’s a rational investor to do? Diversify! By investing in an index fund like the S&P 500, the superstars balance out the poor performers, and you get a higher return as a result.

I already pointed out that over any 30 year period the S&P 500 has never returned less than 8.11%, and the average over all 30 year periods is 11.17%. If you invested $500 a month with an 8.11% annual return, it would take you around 35 years to have $1,000,000.

If you invested $500 a month with an 11.17% annual return, it would take you around 29 years to have $1,000,000.

Recently Fidelity’s Contrafund was in the news for having an average annual return of 13.1%. At that rate, $500 a month would take around 26 years to grow to $1,000,000. So why doesn’t everyone just invest in the Contrafund?

In a word, *risk.* I don’t know of a single financial advisor who would build a retirement plan based on a 13.1% return. None would probably estimate a 3% return either. Since no one is a psychic, the best you can do is check to see if the rate you’re counting on is realistic.

But do you even *know* what annual return you’d need to meet your retirement goals? To find out, I’ve created the following calculator. To use it, put in your current age, retirement age, and how much you invest each month. You can optionally add how much you plan to increase your retirement contributions each year, and how much money you’ve already saved. Once you’ve entered the required data, use the slider to increase and decrease your average annual return. You’ll then see the impact your return rate has on the balance you’ll have come retirement.

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