How to Calculate Investment Shortfall

The purpose of saving and investing is simple: You want to accumulate enough money to achieve a financial goal. Common goals include paying for your children’s college education and providing retirement income. It is wise to periodically estimate your progress by calculating projected investment shortfall or surplus. If you find yourself coming up short, you might want to save more or search for investments that offer better rates of return. Investment projections are always estimates because the future value of some variables cannot be determined in advance.

Add up the current value of your investments. Include only funds earmarked for the purpose for which you are calculating investment shortfall. For example, if you are looking at investments earmarked for your retirement, do not include savings designated for college tuition.

Estimate your rate of return, also called return on investment, or ROI. If your money is in interest-bearing securities such as bonds and certificates of deposit, ROI equals the rate of interest you receive. If you have invested in stocks, ROI equals the gain in share value plus any dividends paid, expressed as a percentage of the purchase price of the shares. To improve the accuracy of your calculations, it is a good idea to use the average annual ROI for the last five years. This helps avoid unrealistic estimates due to an unusually good or bad year.

Calculate an estimate of the future value of your investments for your target date. For example, if you plan to retire at age 65 and you are 50, you want an estimate of the total value of your investments in 15 years. This formula and calculation are complicated, so you need to use a financial calculator or a spreadsheet program such as Excel.

Enter the formula in the spreadsheet. This may not be necessary if the software comes with the formula included. The formula is F = C(1 + I)^N + (P/I)[(1 – I)^N -1]. F is the estimated future value you are calculating. C is the current value of your investment. I is the monthly interest rate or ROI, which is equal to 1/12 of the annual ROI. P is the average amount of savings you add to your investment accounts each month. N is the number of months until your target date. The “^” symbol indicates the next symbol is an exponent. Once you have entered everything, follow the spreadsheet instructions to calculate the future value of your investments.

Subtract the projected future value of you investments from your investment objective. For example, if you want to accumulate $800,000 for your retirement and your projected future value is $725,000, you have a projected shortfall of $75,000. If your projected future value is greater than your investment objective, you have a projected surplus instead of a shortfall.