Hat tip to Anna Takahashi of Eastside Prep. for pointing this out on the NGPF Forum.

A great way to kick-off your investing unit since the decisions that students make about investing (when to start, how much and their return) will ultimately impact when they can retire.

Ok, so I admit the challenge of getting high schoolers to think about retirement and the importance of starting early, but incorporating some math makes this a more interesting exercise.

This “heat map” does a great job of displaying three variables and their impact on when you can expect to comfortably retire:

• Age when starting to save
• Savings rate
• Investment return

From Radical Personal Finance (link to spreadsheet):

How to read this chart? 

• Each column has a savings rate (expressed as a percentage of salary) while each row represents the age that you start saving at. The overall investment return assumption is 4% (you can copy the spreadsheet and change that assumption too).
• Assuming a 4% return, the green areas show situations that allow you to retire by 40, yellow by 50, red by 65 and gray after 65.
• To take one example, assuming that you graduate college at 22 and start saving 25% of your income at that time, assuming a 4% return, you can expect to retire by 57.

There are clearly some simplifying assumptions made to develop this chart including a consistent savings rate (likely to vary over a lifetime) and the fact that pensions and Social Security are not accounted for (of course, the era of pensions seems to have passed the millenial generation by).

A few questions for your students:

• What are the three assumptions captured in this chart? Of those three, how many are firmly in your control?
• You set a goal of wanting to retire by 50 and plan to start saving at the age of 22. What is the least amount that you can save (as a percentage of your salary) in order to accomplish that goal?
• Answer the following questions based on the chart above:
  • If Tabitha starts saving 25% of her salary at the age of 22 and earns 4% per year on her investments when can she retire?
  • Bill wants to retire at the same age as Tabitha but doesn’t start saving until he is 30 years old. What percentage of his salary will Bill need to save in order to retire at the same time as Tabitha?
• What impact will increasing the investment return of 5% have on the data table? Do you think higher investment returns will reduce or increase the retirement age?
• What does this heat map teach you about saving for retirement?

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Check out this NGPF Activity: What If You Invested That Latte?

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.