How long will it take to reach my net worth goal?
The calculator steps forward one month at a time. Each month your balance grows by the monthly equivalent of the annual return, then that month's contribution is added. Once a year the contribution rises by the increase you set. The first month the balance reaches the goal is your answer.
In the monthly needed mode it solves the same projection backwards. Because the final balance grows in a straight line with the starting contribution, it can find the exact monthly amount that lands on your goal on the target date, including the yearly increases.
How do you set a FIRE number?
FIRE (financial independence, retire early) goals usually start from spending. A common rule of thumb is 25 times your yearly spending, which corresponds to withdrawing 4% a year. Spend 40,000 a year and the rule gives a target of 1,000,000 in investable assets.
The 4% rule comes from historical US market studies and is a starting point, not a guarantee. Many people use a lower withdrawal rate (a higher multiple) for early retirement. Note that a FIRE number usually counts investments you can draw on, not your home, so you may want to set the goal on that part of your net worth.
Worked example
The pre-filled figures are illustrative: a net worth of 150,000 today, 1,500 added each month and raised 3% a year, an expected return of 6% a year, and a goal of 1,000,000.
Raising contributions with your pay shaves about a year and a half off. The return assumption matters even more: small changes compound over 15 years, so try a pessimistic and an optimistic figure as well.
Limitations
- Returns are assumed to be steady. Real markets go up and down, and the order of good and bad years changes the outcome.
- Figures are in today's money only if you use a real (after-inflation) return. With a nominal return, the goal will buy less when you reach it.
- Tax, fees and big one-off costs aren't included.
- It projects one balance. Property, retirement accounts and cash grow at different rates, so a single return is an average.
Questions
What return should I assume?
Use a figure that matches what you hold and subtract fees. Many people use a conservative real return (after inflation) of 3–5% for a mixed portfolio. Try a few values: the answer is sensitive to it.
Should I include my home in the goal?
For a pure net worth goal, yes. For a FIRE or retirement target, most people exclude the home they live in, because it doesn't produce income to live on.
What is a FIRE calculator?
A calculator that tells you when your investments could cover your spending, so work becomes optional. Set the goal to your FIRE number (for example 25 times yearly spending) and this calculator shows when you'd reach it.
How is the monthly return worked out?
As the rate that compounds to the annual return over 12 months: (1 + annual)^(1/12) − 1. For 6% a year that's about 0.487% a month, not 0.5%.
Does it account for inflation?
Only if you enter an after-inflation return. With 7% expected growth and 2.5% inflation, enter about 4.5% to keep the goal in today's money.
