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Investment Calculator: Is Your Financial Plan on Track?
Creating a long-term investment plan is essential if you hope to enjoy a secure retirement, pay for end-of-life care, and leave something behind for your family or heirs. Yes, markets move up and down, and there are many variables, but the bottom line is that without a reasonable idea of what to put away each month, your plans are likely to flounder. Sadly, most people don’t find out they’re off track until it’s far too late.
How to Use This Calculator
The investment calculator we created here can help you figure whether your current investment plan stacks up to your long-term goals. It’s a relatively simple approach: just input the amount of money you want to have saved by the time you retire, as well as your investment timeline and your assumed rate of return, and see whether you’re on track. Meanwhile, this tool also allows you to measure the impact of periodic contributions that could help you reach your goals faster.
If you’re a bit stuck on the concept of assumed rate of return, you can use a historical stock market average of about 7%. However, you should know that recently stock market returns can fluctuate above and below that number. In the most recent decade we have been experiencing below average returns, so a number like 5% may be more appropriate.
Once you enter your variables into the calculator, you should be able to gauge:
- How close your current strategy gets you to meeting your investment goals
- How much more money you may need to invest
- Whether you’ll need to hit a higher rate of return to reach your goals
- Any adjustments you might need to make to your investment timeline
Are you on track to meet your investment goals? Find out with the investment calculator featured below.
Types of Investments and Investing Terms
Reaching your investment goals requires planning, a good grasp of investing basics, and sometimes, a stroke of luck. To maximize your potential as an investor, you should become acquainted with the types of investments available to you. This glossary of terms can help:
A 401(k) is a retirement plan typically sponsored by an employer. This type of investment vehicle relies mainly on payroll deductions for contributions, yet allows money to grow tax-free until it is withdrawn from the account. Investments offered in your 401(k) can vary, but typically include a variety of mutual funds. Some companies also offer employees a dollar-for-dollar match up to a certain percentage of your annual contribution.
An annuity guarantees its owner annual payouts for life in exchange for an upfront investment. Where fixed-rate annuities pay a fixed sum of money at regular intervals, variable rate annuities fluctuate depending on the performance of the investments chosen within the annuity itself.
Bonds are the equivalent of an IOU or promissory note issued by a government or corporation. Bonds can be purchased for either short- or long-term investment timelines, but generally offer a lower rate of return because they are less risky than other types of investments.
Certificates of Deposit (CDs)
Traditional certificates of deposit (CDs) allow investors to earn a fixed interest rate on their money for a predetermined length of time. Unlike regular savings accounts, however, traditional CDs typically enact a penalty for early withdrawals. Other types of CDs include variable rate CDs, liquid CDs, callable CDs, jumbo CDs, and IRA CDs. Each type of CD offered comes with its own set of rules regarding interest accrual and withdrawals.
Commodities are raw materials that can be bought, traded, or sold. Common examples include gold, oil, beef, lumber, rice, wheat, silver, and iron ore. Investors buy and sell commodities such as these through futures contracts on various investment exchanges.
Exchange-Traded Funds (ETFs)
An exchange-traded fund, or ETF, is essentially a mutual fund that can be bought and sold on stock exchanges. ETFs can include assets such as stocks, commodities, and bonds, and experience price changes throughout the day based on fluctuations in value. ETFs can often be grouped by industry — for example, a collection of energy stocks — and track a specified index, such as a stock index or bond index.
Hedge funds use pools of underlying securities to create alternative investment vehicles for sophisticated investors and high-net-worth individuals. Since hedge funds are not regulated by the U.S. Securities and Exchange Commission (SEC), they are able to invest in a wider range of securities and take on large risks with the goal of securing equally large returns.
Investing in foreign companies can help you diversify your portfolio and take advantage of fast-growing markets abroad. While investing internationally is one way to broaden the scope of your investing strategy beyond the U.S. economy, there are noted risks and disadvantages, including exposure to political and economic calamities abroad, decreased liquidity, and less regulated markets that offer fewer protections for investors.
Money Market Fund
Money market funds are bundled investments sold directly to consumers. These funds typically hold investments in short-term debt securities, such as U.S. Treasury bills. Most consumers view money market funds as type of bank deposit, but with a traditionally higher interest rate.
Municipal bonds are bonds issued by a state or municipality, such as a city or county. Municipal bonds — also called “munis” (pronounced “mu-nees”) — are typically exempt from federal, state, and local taxes within the state of issue, which makes them attractive for investors seeking a fairly safe investment with potential tax savings.
Mutual funds are investment vehicles that allow you to pool your money with other investors to buy an assortment of stocks, bonds, or other securities — thereby offering instant diversification. Actively managed funds employ a fund manager to make investment decisions, which makes them a bit costlier to invest in, while index funds simply track a predetermined index.
Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) are organizations that invest in income-producing real estate or mortgages and sell shares to consumers. These shares are typically bought, sold, and traded on major exchanges alongside traditional stocks, and are known for paying higher-than-average dividends.
Stocks are investments that represent a share of ownership in a company. Stocks are bought and sold individually or bundled together and marketed in groups (such as in mutual funds). While stocks are not fixed-rate investments, they are arguably one of the most important, and most profitable, investments for individual and institutional investors.
How Can I Avoid Investment Fraud?
According to the Federal Bureau of Investigation (FBI), investment fraud is a widespread and costly problem. White-collar crime includes everything from corporate fraud to financial institution fraud, in addition to fraud targeting individual investors.
As the U.S. Department of Justice notes, many instances of investment fraud are hard to spot because they actually start as traditional – and honest – investment programs. However, even the best investment programs may slowly morph into a Ponzi scheme or other type of fraud as markets decline. And while investment fraud schemes tend to unravel over time, they siphon money from individuals and ruin lives as they run their course.
The Securities and Exchange Commission offers plenty of advice on how to spot, and ultimately avoid, individuals or businesses whose goal is extorting your life savings. Below is a summary of their advice:
1. Ask questions.
Conducting your own independent research is the best way to detect fraudulent activity or dishonesty. “Fraudsters are counting on you not to investigate before you invest,” notes the SEC. If you do a little digging, you can usually find out whether an investment is legitimate or not. And if something sounds too good to be true, it probably is.
2. Take time to understand your investments.
Warren Buffett is famous for suggesting that investors should “invest in what they know,” and for good reason. Understanding your investments is the best way to get a handle on any inherent risks and detect any potential for fraud that may arise.
3. Know the salesperson.
If you plan on investing with an individual, you should know that person’s history, including any disciplinary actions taken against them in the past. You should also find out whether they are licensed to sell securities in your state. The SEC offers a free database that includes the disciplinary history of brokers and advisors, and that’s a good place to start.
4. It’s okay to be suspicious.
Unsolicited offers and mailers should definitely arouse your suspicion as an investor with money to spend. Before you invest your dollars with anyone, you should conduct due diligence to ensure they are who they say they are.
5. Protect yourself online.
There are plenty of fraudsters online hoping to gain access to your private or financial information. To protect yourself online, you should never volunteer private or specific information regarding your investments or bank accounts. Also conduct due diligence before sharing any account numbers or private details such as your Social Security number.
Investment Fraud: Red Flags to Watch Out For
In addition to offering tips on protecting yourself from investment fraud, the SEC points out several “red flags” to watch out for and avoid. Remember, if it seems too good to be true, it probably is. Here are some specific tactics fraudsters may use to get their hands on your money:
- Promises to help you “get rich quick”: If an investment professional promises they can help you get rich quick, you should turn around and walk out the door. Investments that promise huge gains without a corresponding level of risk are likely extremely risky if not outright fraud.
- Guaranteed returns: Few investments offer guaranteed returns, so you should be wary of any salesperson who makes such a claim. While a low guaranteed return might be completely feasible, such as with government Treasury bonds, guaranteed returns at a high rate should give you pause for concern.
- Pressure to make a quick decision: If a salesperson wants you to invest before you have time to research their credentials, you should be extremely careful. Most honest investment professionals wouldn’t want you to make a hasty decision based on fear. Take your time before you invest, and don’t let anyone pressure you into acting before you’re ready.
- Smooth-talking salespeople: Fraudsters are often groomed to appear trustworthy and friendly with your best interests in mind. Don’t judge anyone you meet based on outward appearance alone. Instead, conduct a thorough investigation of their credentials and history.
Types of fraud commonly perpetrated against individual investors can include, but are not limited to:
- Advance Fee Fraud: A fraudster will ask for advance payment on an investment they propose, only to disappear with your money or ask for more money later.
- Affinity Fraud:This type of fraud is perpetrated against a specific group of people, usually bound by age or ethnicity. A fraudster pretends to be part of the group, then uses the trust they build to extort money from their “peers” under the guise of an investment opportunity.
- High-Yield Investment Programs: High-Yield Investment Programs, also known as HYIPs, offer incredible gains for almost no risk. These programs are typically unregulated and run by unlicensed individuals, and almost always ripe with fraud.
- Internet and Social Media Fraud: Fraudsters use the Internet and social media to locate and target vulnerable groups for fraud.
- Microcap Fraud: Microcap fraud is a type of fraud that is built around the sale of low-value stocks or investments. Many of these schemes aim to build the value of the investment up, only to sell shares and cash out later.
- Ponzi Scheme: A Ponzi scheme is a type of investment built on fraud. Typically, these schemes use money from existing investors to lure in new ones, but with no underlying investment to support the returns. Once the scheme runs out of new investors, it falls apart.
- Pre-IPO Investment Schemes : This type of fraud involves offering investors access to stocks before the initial public offering.
- Promissory Notes: Promissory notes are investments sold by companies hoping to build capital. While many promissory notes are honest investments, fraudsters often use this angle to extort money from individuals who think they are loaning money to a corporation or business entity.
- Pump and Dump Schemes: Pump and dump schemes take place when fraudsters artificially build up the value of a stock or investment so they can cash out after the stock goes up and profit at the expense of any investors they fooled into buying it.
How Seniors Can Avoid Investment Fraud
According to the Consumer Financial Protection Bureau, older adults are a common target for individuals hoping to achieve personal gain through the use of fraudulent investments. The CFPB even terms the extortion of senior citizens differently, using the words “elder financial exploitation” to describe it. The CFPB describes elder financial exploitation as follows:
“Financial exploitation is the fraudulent or otherwise illegal, unauthorized, or improper actions by a caregiver, fiduciary, or other individual in which the resources of an older person are used by another for personal profit or gain; or actions that result in depriving an older person of the benefits, resources, belongings, or assets to which they are entitled.”
As the CFPB notes, anyone can become the target of financial exploitation. However, senior citizens are commonly targeted because they generally have a regular income as well as accumulated assets. Meanwhile, older generations may be more trusting and polite than the general population, leaving them open to fraud and scams that would be harder to perpetrate on a younger investor.
The CFPB also notes that senior citizens are less likely to report financial fraud or exploitation, possibly due to embarrassment, or even due to the fact that the person who exploited them is someone they know.
Types of financial exploitation commonly experienced by and perpetrated against senior citizens can include:
- Abuse of Power of Attorney privilege
- Theft of money or property by a caregiver, family member, or stranger
- Investment frauds and scams, some of which offer a “free lunch and seminar” to lure in senior citizens
- Affinity fraud
- Ponzi schemes
- Telemarketing and direct mail investment scams
- Identity theft
- Reverse mortgage fraud
- Online scams
- Fraudulent or misleading annuity scams
To avoid becoming a victim to any one of these scams, the CFPB offers similar advice to that of the SEC. For example:
- Don’t trust someone based solely on their voice or demeanor. Always check someone’s background before trusting them with your money.
- Don’t let anyone rush you. Take your time and explore all of your options before investing your hard-earned dollars. If you need to “act today” to get in on an investment, you shouldn’t be involved.
- Don’t let anyone pressure you. Know where to draw the line, and stick to your guns. Anyone who pressures you into investing you should be avoided.
- Make sure the final say is yours. Don’t let anyone sign off on your investments for you; insist on reading through all paperwork and making all final decisions on your own.
- Be wary of financial advisors who aren’t forthcoming. Don’t trust financial advisor who shelters you from the realities of your investments and their performance.
- Never make checks payable to an individual. Only make checks out to a bank or financial institution.
- Take immediate action if you are unsure or worried you have become a victim of fraud. Don’t let embarrassment or fear deter you from reporting likely instances of fraud. If you need help reporting or sorting the issue out, seek the counsel of a third party you trust.
The CFPB suggests running a basic background check on any investment professional you rely on for advice. The Financial Industry Regulatory Authority (FINRA) allows you to do so by visiting FINRA.org, or calling their BrokerCheck hotline at 1-800-289-9999.
The following resources are also available for seniors who want to learn more about how to protect themselves from fraud:
- Financial Industry Regulatory Authority: Understanding Professional Designations
- Financial Industry Regulatory Authority: Professional Designation State Laws
- Financial Industry Regulatory Authority: BrokerCheck
- Federal Bureau of Investigation: Fraud Target – Senior Citizens
- Securities Exchange Commission: Seniors
- Securities Exchange Commission: “Senior” Specialists and Advisors: What You Should Know About Professional Designations
- North American Securities Administrators Association: Senior Investor Resource Center
- North American Securities Administrators Association: Senior Certification Designation Information Center
Will My Investments Last Long Enough?
Because senior citizens are living longer lives, it’s crucial for them to determine how long their nest egg will last. This financial calculation should include investments you can access once you reach retirement age, along with Social Security payments and any company pension or benefit you receive on an ongoing basis.
How long your money will last depends on how much money you have invested, the average rate of withdrawals you plan to take each year, and of course, how long you hope to live. While there is no hard and fast rule that applies to everyone, retirees have historically relied on the “4 percent rule,” which implies an annual withdrawal rate of four percent.
Four percent is typically considered the “safe” withdrawal rate for most retirees, since it is generally low enough to allow your account balance to deplete very slowly throughout the course of your retirement. This rule is just a general guideline, however, since how long your money will last will depend on your specific circumstances, including the size of your nest egg and your annual rate of return.
If you want your money to last as long as possible, there are several steps you can take. Consider these tips as you seek to make your money outlast your retirement:
- Cut your expenses as much as possible before and during retirement. The less you spend each month, the less money you’ll need to withdraw.
- If you’re eligible for Social Security benefits but can wait a few years, consider putting it off as long as possible. The longer you can wait, the higher your monthly payments will be.
- Once you start receiving Social Security benefits, wait to cash out your tax-advantaged accounts as long as you can.
- Consider relocating to an area with a lower cost of living, or downsizing your home.
- If your home is paid in full, as it hopefully is by retirement, you can also consider a reverse mortgage. A reverse mortgage will provide you with a monthly income while allowing you to stay in your home until you pass away.