How Much Should I Invest? Create Precise Monthly Investment Goals

And while there is beauty in the simplicity of this kind of generalized advice, it’s also not very precise. In your specific situation, investing 10% of your take-home pay may be too much. And, for others, it may not be nearly enough.

To get a more specific idea of how much you need to invest each month, you’ll need to think through a few more variables. Let’s take a look at how to calculate more precise investing goals that are tailored to your situation and needs.

How to Calculate Your Monthly Investing Goal

Here are three steps to take to find your target monthly investing amount.

1. Know How Much Annual Income Youll Need for Retirement

To know how much you should invest today, you’ll need to think through what would be your ideal annual income from your investments. For sake of simplicity in this guide, were going to assume that you want to fully replace your working income in retirement.

2. Determine Your Minimum Retirement Investment Balance

Next, apply the 4% rule to determine how much money you’ll need to have saved by retirement to reach your income goal. The 4% rule states that, in most cases, retired investors who withdraw 4% or less of their total assets in a given year will never deplete their balance.

It’s important to point out that the 4% rule is not a law or guarantee. However, back-test studies of the market have repeatedly shown that if you follow the 4% rule, the chances are very low that you will outlive your money.

Using the 4% rule, if you want an annual retirement income of $40,000, you’ll need to save $1 million. And if you want to spend $100,000 per year in retirement (while following the 4% rule), you’d need a starting account balance of $2.5 million.

3. Calculate Your Monthly Savings Target

Finally, you can use an investing or retirement calculator to see how much you’ll need to put away each month to reach your savings target by your retirement date.

To use a retirement calculator, you’ll need to estimate your annualized rate of return. The S&P 500 has averaged a 10% rate of return over its entire history, so that’s a great place to start. However, you’ll also want to consider your tolerance for risk.

If you prefer a highly conservative portfolio, you may want to estimate a lower rate of return. On the other hand, aggressive investors may want to estimate higher returns than the overall market. Also, some of the best calculators, like the one offered by Personal Capital, can run Monte Carlo simulations against thousands of market scenarios.

If you’ve already put some money away for retirement, you’ll want to take that into consideration as well. With most retirement calculators, there will be a field where you can enter your starting balance. These are our 10 favorite retirement calculators.

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How Much Should You Invest?

Using the instructions described above, we’ve created charts that show how much you should be investing each month if you make $25,000, $50,000, $75,000, $100,000, and $250,000. Again, these numbers are based on the assumption that you want to fully replace your income in retirement.

These charts also compare a 5% versus 10% annual rate of return and show how much you’d need to save if you started at 20, 30, 40, or 50 years of age (assuming a retirement age of 65).

As is clearly shown below, the higher your rate of return and the earlier that you start putting money away towards retirement, the less money you’ll need to invest on a monthly basis.

If You Make $25k

Using the 4% rule, you’d need a savings balance of $625,000 to fully replace a $25,000 annual income throughout retirement. Here’s how much you’d need to invest each month to hit your retirement savings goal on time (rounded up to the nearest $10).

If You Make $50k

Using the 4% rule, you’d need a savings balance of $1.25 million to fully replace a $50,000 annual income throughout retirement. Here’s how much you’d need to invest each month to hit your retirement savings goal on time (rounded up to the nearest $10).

If You Make $75k

Using the 4% rule, you’d need a savings balance of $1.88 million to fully replace a $75,000 annual income throughout retirement. Here’s how much you’d need to invest each month to hit your retirement savings goal on time (rounded up to the nearest $10).

If You Make $100k

Using the 4% rule, you’d need a savings balance of $2.5 million to fully replace a $100,000 annual income throughout retirement. Here’s how much you’d need to invest each month to hit your retirement savings goal on time (rounded up to the nearest $10).

If you make $200k

Using the 4% rule, you’d need a savings balance of $5 million to fully replace a $200,000 annual income throughout retirement. Here’s how much you’d need to invest each month to hit your retirement savings goal on time (rounded up to the nearest $10).

Compare Discount Brokerage Accounts

Best Online Discount Brokers Firms

• Ally Invest: Best for new investors and those looking for a very easy website to navigate.
• TD Ameritrade: Ideal for more experienced traders looking for a rich set of tools and resources.
• E*TRADE: Offers trading platforms and tools for any investment style.

Important Variables to Consider

In the examples above, we assumed that you would need 100% of your working income replaced in retirement. But, in reality, that may not be the case. Just because you make $200,000 per year now doesn’t necessarily mean that you’ll need that much annual income to enjoy a comfortable retirement.

Conversely, some people may plan to increase their standard of living in retirement to accommodate more travel.

Here are a few other variables that can affect how much you need to invest per month:

• Target retirement age: If you plan to retire early (like many members of the FIRE movement), you may need to save significantly more per month. And the opposite could be true if you plan to work till age 70 or older.
• Taxes: Currently, you have to pay taxes on your working income. But if you’re able to shield a large portion of your retirement income inside an IRA, 401(k), or another retirement account, that reduces the amount you’ll need to save to replace your take-home pay.
• Social security: Expected Social Security payments are one of the reasons that many experts recommend that you aim to replace 70% to 80% of your working income instead of the full amount. In January 2020, the average Social Security monthly benefit was $1,503. Estimate your Social Security benefits.
• Additional income: Will you have any supplemental income in retirement, like from a rental property or a part-time job. If so, this could significantly reduce your retirement number and the amount you need to save per month.

If you’d like professional help with calculating how much you should be investing for retirement, you may want to consider setting up an appointment with a Certified Financial Planner (CFP).

The Bottom Line

If you’re not sure where you start with investing, be sure to check out our complete guide. You may also want to take a look at our top stockbrokers and robo-advisors of 2020.

Finally, it should be noted that many people cant invest as much as they’d like due to hefty debt payments or other financial constraints. That’s okay! Just start with an amount that you can afford, even if it’s just $25 per month or less.

Check out our favorite micro-investing apps.

Also Read: How to Invest with Little Money