Retirement planner

How this calculator works

Each year of retirement, the calculator adds up your expenses, raised by inflation every year, and subtracts your income. Social Security rises with inflation, while pension and other income stay flat, as most pensions do. The shortfall is taken from your savings at the start of the year, and whatever is left grows at your expected return. It then works backward to find the savings you would need at retirement, the return you would need, and the highest monthly expenses that would let the money last to your chosen age. Many retirees hold a mix of stocks and bonds, so returns of 4% to 7% a year are common planning assumptions, lower than the long-run stock market average.

A worked example

The example retires at 60 with $1,000,000, spends $5,600 a month in today's dollars, earns 6% a year, and assumes 3% inflation. Social Security of $3,200 a month starts at 67.

In the first year the plan takes $67,200 from savings, a 6.7% withdrawal rate. For seven years nothing else is coming in, and the balance slides from $1,000,000 to about $853,600. At 67 Social Security begins. By then inflation has raised the benefit to about $47,200 a year, and the amount taken from savings drops from about $80,200 to $35,400. The withdrawal rate falls to 4.1% and the balance steadies.

The money lasts past 100, with about $533,900 left, which is about $163,700 in today's dollars. But the margin is thin. At a 5% return the money runs out at 95, and at 4% it runs out at 89.

How to read your results

Three rows show how much room the plan has. "Savings needed" is the smallest starting balance that would last, $951,033 in the example. "Return needed" is the lowest steady return that works, 5.6%. "Highest monthly expenses" is how much you could spend, $5,767. When your own numbers sit close to those limits, as the example's do, the plan works on paper but has little room for a bad decade.

The small table repeats the plan at seven different returns. The year-by-year table shows every age, with the row where Social Security starts highlighted. Watch the withdrawal rate column: a rate that climbs every year means the balance is being drawn down faster than it grows.

Common mistakes to avoid

• Guessing at expenses. This is the number the whole plan rests on. A year of real records, such as a yearly ledger, is far better than an estimate.
• Planning with average returns only. Real returns arrive unevenly. Poor returns in the first years of retirement do more damage than the same returns later, so test your plan at a return a point or two lower.
• Leaving out taxes. Withdrawals from traditional 401(k)s and IRAs are taxed as income. If most of your savings are in those accounts, add your expected tax bill to your expenses.
• Underestimating healthcare. Retiring before 65 means paying for health insurance until Medicare begins, and Medicare itself has premiums and out-of-pocket costs.
• Planning to an average life expectancy. Half of people live longer than average. Planning to 95 or 100 protects the outcome you would least like to face.