The Only Saving Rate Article You Will Ever Need—Using Just a Handheld Financial Calculator!

Abstract

Individual retirement savings are becoming the key to retirement security as defined benefit retirement plans slowly disappear. Yet, little guidance is available to show a saver how to safely plan to achieve his or her desired retirement savings target amount. The authors show how to use ordinary annuity payment math—readily adaptable to handheld financial calculators or spreadsheet programs—to calculate the savings needed in a given year in order to make the desired amount of progress toward a particular retirement savings target, regardless of investment returns each year. Portfolio fluctuations from investment returns are properly fed back into the savings rule: Investment losses are amortized automatically over the remaining working years through the annuity payment calculations, so return volatility translates directly to savings volatility, smoothed only by the time remaining in the amortization. This means that the more risk one takes on in the portfolio, the greater the volatility in the required rate of savings, which in turn acts as a dampener on the extent of risk that the investor will find desirable in the portfolio.