How the Retirement Calculator Works
How the Retirement Calculator Works
The Retirement Calculator answers two questions: how much could you have saved by the day you retire, and will that be enough to pay for the life you want until the age you plan for? It grows your savings up to retirement, then spends them down year by year, and tells you whether the money runs out.
What you enter
- Current age, retirement age and plan-to age: when you stop working, and how long you want the money to last.
- Current savings and monthly savings: what you have now and what you add each month.
- Return before and in retirement: the yearly growth you expect. It is often lower in retirement, because savings usually move to safer investments. These are assumptions, not promises.
- Inflation: how fast prices rise. This makes the income you want cost more by the time you retire.
- Income wanted: the monthly amount you would like to live on, in today's money.
- Other income: money that does not come from your savings, such as Social Security, a pension or rent, in today's money.
Step 1: saving up to retirement
For every month until you retire, the balance earns a month of growth and then you add your monthly saving:
new balance = old balance x (1 + monthly return) + monthly saving
The monthly return is the yearly return divided by 12. The balance you end up with is your savings at retirement. The calculator also shows it in today's money, by removing the effect of inflation, so you can judge what it is really worth.
Step 2: the income you will need
Prices rise, so the income you want today costs more in the year you retire. The calculator raises both your wanted income and your other income for inflation up to that year. What is left is the amount your savings must cover:
savings must cover = wanted income - other income (both in retirement-year money)
Step 3: spending the savings down
In retirement, the calculator takes out that monthly amount every month. It raises the withdrawal by inflation once a year, and the money that is left keeps earning the after-retirement return. It keeps going until either you reach your plan-to age or the money runs out. It also works out the balance you would need on your first day of retirement for the money to last exactly that long.
Your result
- On track means your savings should last to your plan-to age.
- Short means the money runs out earlier, and the calculator shows the age. It also shows the shortfall, and how much extra you would need to save each month to close it.
A worked example
Say you are 30 with $25,000 saved. You add $500 a month, earn 7% until you retire at 65, then 5% in retirement. Inflation is 2.5%. You want $4,000 a month in today's money, and $1,500 of that will come from Social Security. You want the money to last to age 90.
| Step | Result |
|---|---|
| Savings at 65 | $1,188,181 (about $500,665 in today's money) |
| Income wanted at 65, after 35 years of inflation | $9,493 a month |
| Other income at 65 | $3,560 a month |
| Savings must cover | $5,933 a month |
| Savings needed at 65 to last to 90 | $1,307,102 |
| Shortfall | $118,921 |
| Money runs out at about | age 86.9 |
| Extra to save each month to close the gap | $66 |
Chart: your savings over the years
This chart shows the same example, in thousands of dollars. The balance climbs while you save, peaks the day you retire, and then falls as you spend it. The longer the bar, the more you have.
Age 30 █ 25 Age 35 ██ 71 Age 40 █████ 137 Age 45 ████████ 230 Age 50 ████████████ 361 Age 55 ██████████████████ 548 Age 60 ███████████████████████████ 813 Age 65 ████████████████████████████████████████ 1,188 (retire) Age 70 █████████████████████████████████████ 1,100 Age 75 ███████████████████████████████ 931 Age 80 ██████████████████████ 651 Age 85 ███████ 220 Age 90 (money has run out)
Ways to close a shortfall
- Save a little more each month. Because the money has decades to grow, even a small extra amount early on makes a big difference.
- Retire a year or two later. You save for longer and spend for fewer years.
- Lower the income you plan to spend, or plan for other income such as part-time work.
- Check your other income. Your Social Security estimate is in your account at ssa.gov.
What this calculator does not include
- Taxes on withdrawals. Money from traditional accounts is taxed as income, so you may need more than the calculator shows.
- Healthcare and long-term care costs, which can be large in later life.
- Ups and downs in the markets. A steady return is an assumption. A bad year just before or after you retire can hurt much more than the average suggests.
- Required minimum distributions from pre-tax accounts.
This tool gives an estimate for general information only. It is not financial, tax or investment advice. For a plan built around your own situation, talk to a qualified financial adviser.