The Power of Present Value

2006-05-29

Will $1,000,000 be enough to retire on? We have all heard that if you can reach the million dollar goal your retirement will be set. But for those that are in their early thirties, a million may not cut it.

You see, one million dollars today just will not carry the same value twenty to thirty years from now. To help you understand what we are talking about, we will look at something called Present Value.

Present Value is defined as the monetary value today of a future income stream, given a certain rate of return. In other words present value accounts for the time value of money.

Using our Present Value Calculator will can illustrate what we mean. Let's say for example you are 35 years old now and want to retire at age 60.

1) We input $1,000,000 as the Future Value

2) We then input 3% as the discount rate. This accounts for the 3% average annual inflation you will experience over the next 25 years.

3) Enter 25 years for the time frame until you retire.

4) Select Annually for the compound option. You can choose your option here. We used Annually since inflation is usually calculated that way.

Our result is that $1,000,000 25 years from would be like trying to retire on $477,605.57 today. Maybe you can live comfortably on that figure. Many people can. We simply want to show people that you need to be sure when planning your retirement that you consider the present value of your which will be 25-30 years from now.

Take some time and play with the numbers yourself to find what your goal is now and how it will be affected 20 years from now. Think about if you retired today, what you would be comfortable retiring on. Then see what you would need to save to have the same buying power when you retire. You maybe surprised.

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