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Articles
How Much Do I Need to Invest?
In his book “Charles Schwab’s Guide to Financial Independence” (1998), a worksheet titled “How Much Would You Need to Invest” is illustrated. Before calculating how much you would need to invest today to reach your future goals, you will need to visit three tables:
| Table 1: Inflation Factor |
| # of years to your goal |
inflation factor |
| 5 |
1.22 |
| 10 |
1.48 |
| 15 |
1.80 |
| 20 |
2.19 |
| 25 |
2.67 |
| 30 |
3.24 |
| 35 |
3.95 |
| 40 |
4.80 |
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| Table 2: Portfolio Compounding Factor (compounded annually) |
| # of years to your goal |
5% |
6% |
7% |
8% |
9% |
10% |
| 5 |
1.28 |
1.34 |
1.40 |
1.47 |
1.54 |
1.61 |
| 10 |
1.63 |
1.79 |
1.97 |
2.16 |
2.37 |
2.59 |
| 15 |
2.08 |
2.40 |
2.76 |
3.17 |
3.64 |
4.18 |
| 20 |
2.65 |
3.21 |
3.87 |
4.66 |
5.60 |
6.73 |
| 25 |
3.39 |
4.29 |
5.43 |
6.85 |
8.62 |
10.83 |
| 30 |
4.32 |
5.74 |
7.61 |
10.06 |
13.27 |
17.45 |
| 35 |
5.52 |
7.69 |
10.68 |
14.79 |
20.41 |
28.10 |
| 40 |
7.04 |
10.29 |
14.97 |
21.72 |
31.41 |
45.26 |
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| Table 3: Monthly Investment Factor (compounded monthly) |
| # of years to your goal |
5% |
6% |
7% |
8% |
9% |
10% |
| 5 |
68.01 |
69.77 |
71.59 |
73.48 |
75.42 |
77.44 |
| 10 |
155.28 |
163.88 |
173.08 |
182.95 |
193.51 |
204.84 |
| 15 |
267.29 |
290.82 |
316.96 |
346.04 |
378.41 |
414.47 |
| 20 |
411.03 |
462.04 |
520.93 |
589.02 |
667.89 |
759.37 |
| 25 |
595.51 |
692.99 |
810.07 |
951.03 |
1,121.12 |
1,326.83 |
| 30 |
832.26 |
1,004.52 |
1219.97 |
1,490.36 |
1,830.74 |
2,260.49 |
| 35 |
1,136.09 |
1,42.71 |
1,801.05 |
2,293.88 |
2,941.78 |
3,796.64 |
| 40 |
1,526.02 |
1,991.49 |
2,624.81 |
3,491.01 |
4,681.32 |
6,324.08 |
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The first table “Inflation Factor” tells you where inflation will be 5, 10, 15 years from now and so forth. For example, a bottle of Coke costing $1.29 in 1998 will cost $6.19 in 2038. The second table “Compound Factor” is the future value of $1 at the end of n periods. The third table lists the monthly investment factor. These tables can be found in the bureau of labor statistics, most investment or finance textbooks, or you can contact your local Charles Schwab office for more information.
With these three tables in mind, below is a step-by-step illustration to help you determine how much you need to invest. Grab a calculator, some paper, and a pencil and do some calculating:
WHAT IS YOUR INVESTMENT GOAL?
- Goal: $150,000
- # of years to reach goal: 15
- From Table 1 - Inflation Factor: 1.8
- Future goal (line 1 x line 3): $270,000
**Because of inflation, $150,000 in 15 years will be worth $270,000**
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WHAT RATE OF RETURN DO YOU WANT TO AIM FOR?
- Your Rate of Return? 10%
- What is your income tax bracket? 28%
- After-tax rate: .72
- Multiply line 5 by line 7 then round off to the nearest 1.0: 7%
**Your after-tax rate of return is 7%. This rate will be used when calculating your investment goal**
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FUTURE VALUE OF YOUR CURRENT RESOURCES
- Current value of savings or investment portfolio? $25,000
- Using Table 2, locate 15 years and 7%: 2.76
- Multiply line 9 by 2.76: $69,000
- Line 4 minus line 11: $201,000
**You need $201,000 remaining to reach your goal of $270,000**
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AMOUNT YOU NEED TO INVEST TO REACH YOUR GOAL?
- Lump sum investment required (divide line 12 by line 10) $72,826
- Regular monthly investment required (from Table 3): 316.96
- Divide line 12 by line 14: $634
- Annual investments required - multiply line 15 by line 13: $8,242
**You will need to invest at least $634 a month for 15 years to reach your goal**
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For more information, you can purchase Charles Schwab’s Guide to Financial Independence at your local bookstore, through www.amazon.com or www.bn.com, or borrow it from your local library.
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