How to invest money while saving for retirement? This tool may help.

Lots of readers want help with calculating their retirement finances beyond the tables that I use in order to compare various plans for accumulating money, and later for taking it out as retirement income.

This column will show you how to make your own table based on your own data and assumptions. While this won’t help you predict the future, it will help you try out various scenarios using our suggested portfolios.

This is part eight in a series of articles I think of as boot camp for investors 2024.

• The first article showed that over the past 96 years, investors were far better off in stocks than in bonds.
• In the second installment, we saw how even small changes in your stock portfolio can mean millions more dollars in retirement. 
• The third installment showed historical returns and risks of a variety of combinations of equity asset classes.
• In installment four we discussed how to use fixed-income funds to limit your investment risk.
• Then, in installment five we focused on the best ways to accumulate and invest the money that will become your retirement financial engine.
• Installment six showed how to cope when you need to retire with just enough to meet your needs.
• Last time, in installment seven, I showed the (potentially enormous) benefits of saving more than you think you’ll need and of diversifying your equities beyond the S&P 500 SPX  -0.02%

The free online calculator I’m talking about requires a bit of work to master. But being a do-it-yourself investor involves making some challenging choices:

• When you’re saving for retirement, how should you invest your money?
• How much should you keep in bonds and how much in equities?
• What’s the effect of saving more vs. saving less?
• Should you change your investments as you get older, and if so, how will various changes affect your portfolio?
• When you retire, how do you choose a safe withdrawal rate so you won’t run out of money?

One way or another, every investor makes those choices. If you’re ready to try out some options and see how various choices would have turned out, the newly upgraded Lifetime Retirement Calculator is available free on my website.

To test this tool’s usability, I asked a friend to try it out. He spent about 50 minutes with the calculator, modeling how he might have invested his own modest savings in one of our popular portfolios. He agreed to share the data he chose to input and the results the calculator provided. 

By the start of 1978, 12 years after my friend graduated from college and began working full time, he had accumulated $3,000 in retirement savings and had a good job.

He told the calculator to assume he invested that $3,000 in 1978 and added $4,000 a year for the rest of his working life.

He assumed he would have invested this money in an all-equity version of the U.S. Four-Fund Strategy. This combines equal parts of four major U.S. asset classes: large-cap blend stocks (the S&P 500 in other words), large-cap value stocks, small-cap blend stocks and small-cap value stocks.

Then six years before he retired (which would have been in 2006), he would have reduced his equity exposure to 70%, still in the Four-Fund Strategy, with the other 30% in bonds.

Here’s what he found:

• At the end of 2005, after 28 years of investments, his portfolio would have grown to $1,6 million.
• After six more years, he could have retired at the end of 2011 (which he in fact did in real life) with nearly $2.1 million.
• Had he started withdrawing 5% every year based on the previous year-end portfolio value, he would have had $102,623 to supplement his Social Security in 2012.

Since then, he would never have had to “take a pay cut,” since his annual distribution never would have dipped below that $102,623.

The calculator also revealed how challenging it could have been to stick with his program through his last six working years.

• His portfolio gained $222,087 in 2006, but only $16,926 the following year.
• In 2008, the worst stock market year in recent memory, he would have lost $475,680 – and then gained $317,375 in 2009 and another $325,581 in 2010 as the market recovered.

“Those years were a gigantic roller coaster for this portfolio,” he told me.

But if he had stuck with his plan, his portfolio at the end of 2023 would have been worth $3.2 million, meaning he could have taken out $160,645 in 2024.

He was surprised such modest investments and a seemingly late start would have produced such a positive result. He wondered if those results were the result of “good luck” from starting when he did and retiring when he did.

In real life, the market behaves quite differently from year to year and decade to decade.

For example, from 1975 through 1999, the index compounded at more than 17%. But from 2000 until the start of this year, the rate was about 7%.

Regardless of the investment strategy you use, you won’t succeed unless you can stick with your plan during challenging times. The beauty of the calculator is that you can test your ideas using actual historic returns starting in any year from 1970 forward.

One excellent way to use the calculator is to try out various portfolios during the most challenging times — and ask yourself whether or not you would have been able to persevere.

For this purpose, I suggest you try out 2000 for your starting year. In the first 10 years of this century, the markets presented huge challenges for investors, as well as huge opportunities for those who diversified their equities and made it past 2008.

Like any unfamiliar tool, the calculator may require a bit of trial-and-error. But once you get the hang of it, you’ll get answers you won’t find anywhere else. Best of all, it’s free and there’s no hidden “gotcha.”

You can dive right into the calculator here if you like. But you might want to start with a brief video tutorial recorded by Craig Appl, who created the calculator and maintains it. There’s also a longer video in which I interviewed Craig along with two other members of our team.

In our next and final boot camp installment, I’ll describe how young investors can set themselves up for life with an even simpler plan than the one chosen (retroactively and only hypothetically) by my friend.

Richard Buck contributed to this article.



Paul Merriman and Richard Buck are the authors of “We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement.”

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