Determining the future value of your investments requires first making some assumptions about how much you will save each year, when you plan to retire and how you think the stock market will perform over the life of your investments. You must then perform some rather complex financial calculations to determine a future value. Thankfully, free online financial calculators can do the heavy lifting for you.
Determine how much you plan to contribute to your IRA each year. As of 2012, you can contribute a maximum of $5,000 (or 100 percent of earned income, whichever is less) to a traditional IRA if you are under age 50. Investors over age 50 can contribute a maximum of $6,000. Although the same contribution limits apply to a Roth IRA, your contributions could be limited by tax filing status or high income. You can always contribute the maximum to a traditional IRA.
Determine at what age you plan to retire and begin taking money out of your IRA to live on. You can make IRA withdrawals without penalty beginning at age 59 1/2. You must begin taking minimum withdrawals from a traditional IRA beginning in the year after you turn 70 1/2.
Decide on a conservative average annual return for your investments. Although the S&P 500 Index has historically averaged about 10 percent annualized returns over the long term, you need to factor in your costs and your investment mix. For example, if you split your investments between stock and bond investments, you should expect lower average annual returns. Consider using the more conservative average returns reported by The American Association of Individual Investors: about 7 percent for stock allocations, and between five and 6 percent for an investment mix of stocks and bonds.
Choose a free online calculator using the search terms, "future value calculator with additions," to run your assumptions. Some calculators will ask you to choose a compounding interval; that is, how often you expect to receive interest on your interest. The most conservative option is annually.
Complete the calculation fields and press the "calculate" button to see your result. You can change assumptions to see different results on the calculator.
- Retirement Topics - IRA Contribution Limits
- 2012 IRA Contribution and Deduction Limits - Effect of Modified AGI on Roth IRA Contributions
- IRS Publication 590: When Must You Withdraw Assets? (Required Minimum Distributions)
- MSN Money: What’s the average return you can expect on your investments?
- IRS Publication 590: When Can You Withdraw or Use Assets?
- American Association of Individual Investors: Asset Allocation Models
- Consider using a retirement planning calculator to see whether your assets have a chance of outliving you. Additional assumptions might include how much you expect to spend each year in retirement, how long you expect to live, when you expect to receive Social Security payments and whether you will receive a lump sum inheritance or other income. Many major brokerage firms offer such calculators to their clients under the Retirement or Planning tabs on the secure portion of their websites.
- You do yourself no favors by using optimistic assumptions to calculate the future value of your IRA.
- Bear in mind that no financial calculator or set of assumptions can account for changes in market conditions or in your income status.
Julia Thomson began writing professionally in 1996. Her work has appeared in "Stage Directions," "Phoenix New Times" and "The Valley Callboard." Thomson has expertise in investing and personal finance, with three brokers' licenses and certification as a budget counselor. She holds a Master of Music from Indiana University.