How the Retirement Savings Calculator Works
Retirement can last 20 to 30 years or more, and for most of that time you will not earn a salary. The money has to come from what you save, from Social Security or a pension, and from the growth of your investments. The Retirement Savings Calculator answers three questions. What could your savings grow to? What income could that support? And if it is not enough, how much more should you save each month?
What you enter
- Your age now and your retirement age: the time between them is how long your savings can grow.
- Current savings: what you have saved so far for retirement.
- Monthly contribution: what you add each month, including any match from your employer.
- Yearly return: the growth you expect on your investments.
- Inflation: the yearly rise in prices, which lowers what your money can buy.
- Income you want in retirement: a yearly amount, in today's money.
How the results are worked out
Each month your savings earn the monthly return, and your contribution is added. With a monthly return r and n months, and the contribution made at the end of each month:
savings at retirement = current savings x (1 + r)^n + contribution x ((1 + r)^n - 1) / r
Prices rise, so the income you want in today's money will cost more when you retire. The calculator raises it by inflation, and then works out the savings needed to support it:
income needed at retirement = income today x (1 + inflation)^years savings needed = income needed at retirement / 4% savings in today's money = savings at retirement / (1 + inflation)^years
The 4% rule of thumb says that you can take out about 4% of your savings in the first year of retirement, and raise that amount with inflation each year, and your money should last around 30 years. It comes from studies of past markets. It is not a guarantee, so treat it as a guide.
A worked example
You are 30 and plan to retire at 65. You have $25,000, and you save $500 a month. You expect a 7% return, and inflation is 2.5%. You want an income of $48,000 a year ($4,000 a month) in today's money.
| Result | Amount |
|---|---|
| Savings at 65 | $1,188,181 |
| Savings at 65, in today's money | $500,665 |
| Income by the 4% rule | $47,527 a year ($3,961 a month) |
| That income, in today's money | $20,027 a year ($1,669 a month) |
| Income you want at 65 ($48,000 x 1.025^35) | $113,914 a year |
| Savings needed ($113,914 / 4%) | $2,847,846 |
| Gap to the goal | $1,659,665 (you reach 41.7%) |
| Monthly saving needed to reach the goal | $1,421.50 |
The $47,527 looks like nearly what you want. But it is a number in future dollars. In today's money it buys only $20,027 of goods a year, because prices will be 2.4 times higher by then. That is why the calculator shows both.
Chart: how the savings grow
Age 30 █ $25,000 Age 35 ██ $71,237 Age 40 █████ $136,784 Age 50 ████████████ $361,432 Age 60 ███████████████████████████ $812,898 Age 65 ████████████████████████████████████████ $1,188,181
Nearly a third of the final amount comes from the last 5 years alone. That is compounding: the growth earns growth.
Chart: the goal and the gap
Goal $2,847,846 ████████████████████████████████████████ ■ Your projected savings $1,188,181 ■ Gap $1,659,665
What changes the result
The monthly contribution, with the rest of the example unchanged:
| Monthly contribution | Savings at 65 | In today's money |
|---|---|---|
| $250 | $737,917 | $310,937 |
| $500 | $1,188,181 | $500,665 |
| $1,000 | $2,088,708 | $880,121 |
| $1,500 | $2,989,236 | $1,259,577 |
| $2,000 | $3,889,763 | $1,639,034 |
$250 ████████ $737,917 $500 ████████████ $1,188,181 $1,000 █████████████████████ $2,088,708 $1,500 ███████████████████████████████ $2,989,236 $2,000 ████████████████████████████████████████ $3,889,763
The age when you start matters even more. The same $25,000 and $500 a month, until 65:
| You start at | Savings at 65 |
|---|---|
| 30 | $1,188,181 |
| 35 | $812,898 |
| 40 | $548,171 |
| 45 | $361,432 |
| 50 | $229,705 |
Waiting 10 years, from 30 to 40, cuts the result by more than half. To make up for a late start, you have to save much more each month.
How much income will you need?
A common guide is to plan for 70% to 80% of your income before retirement. Some costs fall, such as commuting and saving for retirement. Others may rise, such as health care. Think about your own life: where you will live, what you will do, and whether your home will be paid off.
Where the income comes from
- Your savings, which this calculator estimates.
- Social Security or a state pension. These can cover a large part of your needs. They are not included in the numbers above, so if you expect one, your savings goal may be lower.
- Other income, such as a workplace pension, part-time work or rent.
Tips
- Start as early as you can. Time does more work than the amount.
- Get every employer match. It is free money.
- Raise your saving when your pay rises. Even 1% more each year helps a lot.
- Use a cautious return. A return of 7% is not guaranteed. Try 5% to see a safer case.
- Check your plan every year, and adjust it after big changes in your life.
What this calculator does not include
- Taxes on your savings and on the money you take out.
- Fees on your funds and accounts.
- A return that changes from year to year. Real markets go up and down.
- Social Security, pensions and other income.
- Health care and long-term care costs.
This tool gives an estimate for general information only. It is not financial, tax or investment advice. Consider speaking to a qualified adviser about your own plan.