Impact of how you calculate returns
Previously, I’d posted about my 2045 retirement plan to have $4 million in funds. A few days after I made the post, I realized that the way I calculated my deposits and returns accounted for only yearly deposits, and also returns only once a year. In actuality, I make retirement contribution twice a month (with each paycheck), and since the market is continually changing, I will earn a little extra profit as a result of the deposits during that month. There is no straight across “you had X amount in the account this month, so you gain Y”.
So I decided to do a few alternative calculations for comparison. I knew I would gain more accounting for the monthly transactions, because the small extras over time can make a big difference (power of compounding!).
My original baseline calculation, of a once yearly deposit, showed that I would have a total of $3,961,282 in 2045. By adjusting it to monthly deposits and changing the return calculation accordingly, the total jumped to $4,108,653. And changing it again to twice monthly deposits squeeze out a little more to get it to $4,113,769.
The biggest jump, of course, is going from yearly to monthly deposits, where it shows an estimated gain of about $149k. Yup, $149k extra just based on more frequent deposits. While going from monthly to twice a month only gained an additional $5k.
My point though is two fold: be aware of your assumptions when you are doing calculations, and it can be pretty powerful to make frequent contributions than larger bulk contributions.
As for my projections, I am going to leave them with the original calculations. I tend to air on the side of being conservative, and I don’t need to really squeeze out any penny to show off. Even then, they are just projections. Assuming 8% yearly returns, I could very easily go over some years, or under on others. The calculations and graphs are merely a best guess of where I could be and a visual representation of my path there. They certainly aren’t concrete.
