How Does This Retirement Calculator Work?
Estimating How Much You’ll Have at Retirement
This calculator projects your retirement savings by considering your current balance, annual contributions, and the rate of return on your investments. The projected amount is in today’s dollars, meaning it reflects the purchasing power of your savings in terms of today’s cost of living, after adjusting for inflation. It also assumes these amounts are in pre-tax dollars, meaning taxes on these funds will be paid when you withdraw them in retirement.
See the math:
Estimated Retirement Balance = Current Balance * (1+r)n + Annual Contribution * ((1+r)n−1) r
Where:
• r is the real rate of return (adjusted for inflation).
• n is the number of years until retirement.
Estimating How Much You’ll Need in Retirement
To determine how much you’ll need at retirement, the calculator estimates your future income based on expected increases and adjusts for the percentage of that income you’ll need in retirement. It then calculates the total amount you’ll need in pre-tax dollars, accounting for the taxes you’ll pay on withdrawals during retirement. This figure is also in today’s dollars, reflecting what you would need based on today’s cost of living to sustain your desired lifestyle throughout retirement.
See the math:
Total Amount Needed = Annual Income Needed 1-Tax Rate * 1-(1+r)-(L-R) r
Where:
• Annual Income Needed is based on your future income and the percentage needed in retirement.
• r is the real rate of return during retirement.
• L – R is the number of years in retirement.
Other General Assumptions
• No Consideration of Dividends or Interest Payments: The calculator assumes a single rate of return, without separately accounting for dividends, interest, or other income that might be reinvested.
• Generalized Asset Allocation: It uses a consistent rate of return without differentiating between various asset types (e.g., stocks, bonds, ETFs), not reflecting the performance variations of different investments.
• No Adjustments for Investment Fees or Expenses: The calculator does not account for investment management fees, expense ratios, or trading costs, which may slightly overestimate the final balance.
• Fixed Inflation Rate: A constant inflation rate is assumed throughout the entire period, which may not accurately reflect changes in inflation over time.
• Steady Income and Contribution Growth: It assumes uninterrupted income and contributions, without considering potential changes like job loss, salary cuts, or unemployment.
• Single Real Rate of Return: A single real rate of return is assumed, not accounting for market fluctuations or periods of negative returns.
• No Longevity Risk Beyond Assumed Life Expectancy: It assumes you will live to a specific age, with no additional savings needed if you live longer.
• No Consideration of Social Security, Pensions, or other sources of income: The calculator does not factor in other potential income sources like Social Security, pensions, or annuities.
• Static Spending Needs: The calculator assumes your spending needs will remain constant throughout retirement, without adjusting for potential changes like increased healthcare costs.
