Calculation of Retirement

Retirement Planning Calculator

Years Until Retirement:

Projected Total Savings at Retirement (in today's $):

Projected Annual Retirement Income (in today's $, maintaining purchasing power):

Desired Annual Retirement Income (in today's $):

Annual Shortfall/Surplus (in today's $):

Understanding Your Retirement Planning Calculator

Planning for retirement is one of the most critical financial goals you'll set. It involves estimating how much money you'll need to live comfortably once you stop working and then devising a strategy to accumulate that wealth. Our Retirement Planning Calculator is designed to give you a clear projection of your financial readiness for retirement, all in today's dollars, making it easier to understand your future purchasing power.

How the Calculator Works

This calculator uses several key financial principles to project your retirement savings and potential income. It focuses on real returns and real income, meaning it accounts for the eroding effect of inflation, providing you with figures that reflect actual purchasing power.

Key Inputs Explained:

• Current Age: Your age today.
• Desired Retirement Age: The age at which you plan to stop working. The difference between this and your current age determines your accumulation period.
• Current Retirement Savings ($): The total amount you have already saved specifically for retirement.
• Annual Retirement Savings ($): The amount you contribute to your retirement accounts each year.
• Annual Savings Increase (%): The percentage by which you expect to increase your annual savings each year. This accounts for salary raises or increased financial discipline.
• Expected Annual Investment Return (%): The average annual growth rate you anticipate your investments will achieve before retirement and during retirement. This is a nominal (not inflation-adjusted) rate.
• Expected Annual Inflation Rate (%): The average rate at which the cost of goods and services is expected to increase each year. This is crucial for understanding real purchasing power.
• Desired Annual Retirement Income (in today's $): The amount of income you wish to have each year during retirement, expressed in today's purchasing power.
• Years Retirement Income Needed: The number of years you expect to need retirement income (e.g., from retirement age until your projected lifespan).

The Calculation Process:

1. Years to Retirement: First, the calculator determines how many years you have left to save.
2. Real Return & Growth Rates: It then calculates "real" rates by adjusting your expected investment return and annual savings increase for inflation. This ensures all future values are comparable to today's dollars.
   • Real Return = (1 + Nominal Return) / (1 + Inflation Rate) - 1
3. Future Value of Current Savings: Your existing savings are projected forward to your retirement age, growing at the calculated real return rate.
4. Future Value of Annual Savings: Your ongoing annual contributions, including any annual increases, are also projected forward to your retirement age, growing at the real return rate. This is treated as a growing annuity.
5. Total Savings at Retirement (in today's $): The sum of the future value of your current savings and your annual contributions, all expressed in today's purchasing power.
6. Annual Retirement Income from Savings (in today's $): This is the most critical output. Using the total projected savings, the calculator determines how much annual income you can draw for your specified retirement duration, while maintaining its purchasing power (i.e., adjusting for inflation each year). This is calculated using an annuity payout formula based on the real return during retirement.
7. Annual Shortfall/Surplus (in today's $): Finally, your projected annual retirement income is compared to your desired annual retirement income (both in today's dollars) to show you if you have a surplus or a shortfall.

Example Scenario:

Let's consider an example with realistic numbers:

• Current Age: 30
• Desired Retirement Age: 65
• Current Retirement Savings: $50,000
• Annual Retirement Savings: $10,000
• Annual Savings Increase: 3%
• Expected Annual Investment Return: 7%
• Expected Annual Inflation Rate: 3%
• Desired Annual Retirement Income: $60,000 (in today's $)
• Years Retirement Income Needed: 25 years

Based on these inputs, the calculator would project:

• Years Until Retirement: 35 years
• Projected Total Savings at Retirement (in today's $): Approximately $913,850
• Projected Annual Retirement Income (in today's $, maintaining purchasing power): Approximately $57,840
• Desired Annual Retirement Income (in today's $): $60,000
• Annual Shortfall/Surplus (in today's $): -$2,160 (a shortfall)

In this example, the individual is projected to have a slight shortfall of about $2,160 per year in today's dollars. This indicates they might need to save more, achieve higher returns, or adjust their desired retirement lifestyle.

Interpreting Your Results:

• Positive Surplus: If your projected annual income is higher than your desired income, you're on a good track! You might consider retiring earlier, increasing your desired lifestyle, or leaving a larger legacy.
• Negative Shortfall: If your projected income is lower, it's a signal to re-evaluate your plan. You could:
  • Increase your annual savings.
  • Increase your annual savings increase percentage.
  • Delay your retirement age.
  • Adjust your desired retirement income downwards.
  • Explore investment options with potentially higher (but also higher risk) returns.

Remember, this calculator provides a projection based on your inputs. Market conditions, personal circumstances, and inflation rates can vary. It's always wise to consult with a qualified financial advisor for personalized retirement planning.