Retirement Calculator User’s Guide

Contents:

• • Explanation of Fields

  • Control Buttons

  • Explanation of Charts

Explanation of Fields

Marital Status – Check the button at upper right to toggle between single and married status. If the status is single, the Spouse’s Data fields will not be accessible.

Individual Data (Your Data and Spouse’s Data)

Name – The individual’s name.

Birth Year – Consider rounding it to the nearest year.

Taxable Contrib. – Annual individual contribution to investments whose gains are taxable, including 401-K’s, IRA’s, or individual investment accounts. For this calculator, it does not matter if these contributions are tax-deferred, only that any gain is taxable.

Tax-Exempt Contrib. – Annual individual contribution to investments whose gains are tax-exempt, for example Roth IRA’s.

This calculator assumes that both taxable and tax-exempt contributions will continue until the individual reaches the Target Retirement Age. It also assumes that these contributions will grow at the estimated Growth Rate. Because they do not grow, cash reserves should probably be excluded (unless the estimated growth rate is adjusted downwards to account for them).

The combined taxable and tax-exempt contributions from both partners are plotted as the Savings curve in Chart 1, Projections.

Soc. Sec. Benefits – The expected annual amount of Social Security benefits, as estimated by the Social Security Administration, for each eligible individual. These benefits count as retirement income and subtract from Retirement Expenses when the individual reaches Soc. Sec. Age. However, parts of these benefits (up to 85%) are taxable (see Future Tax Rate). These benefits are plotted as the S. S. Income curve in Chart 1, Projections.

Some believe that the Social Security program will not be fully funded (or maybe not funded at all) when they retire. Adjust this input according to your belief.

Target Retirement Age – Age at which this individual plans to retire. This calculator assumes that annual contributions, taxable and tax-exempt, will stop when the individual reaches this age. If this age is less than 59.5, and if there is no tax-exempt principal available, the calculator will try to estimate early withdrawal penalties. These penalties are for display purposes only. They do not count towards retirement expenses.

Soc. Sec. Age – Age at which the individual becomes eligible for Social Security benefits. By default the calculator uses the full eligibility age based on the individual’s birth year. A custom value can also be input here, but the calculator does not check the validity of custom values.

Common Data

Taxable Balance – Initial value of investments whose gains are taxable, including 401-K’s, IRA’s, or individual investment accounts. For this calculator, it does not matter if these contributions are tax-deferred, only that any gain is taxable. Taxable Contrib. annually increases the value of taxable investments until the individual contributor reaches Target Retirement Age. Growth of these investments is plotted as the Growth curve in Chart 2, Investment Growth.

Tax-Exempt Balance – Initial value of investments whose gains are tax-exempt, for example a Roth IRA. Tax-exempt Contrib. annually increases the value of tax-exempt investments until the individual contributor reaches Target Retirement Age.

This calculator assumes that these investments will grow at the estimated Growth Rate. Because they do not grow, cash reserves should probably be excluded (unless the estimated growth rate is adjusted downwards to account for them).

A rule of thumb of retirement planning states that retirees can spend at most 4% of their investments annually without risking depletion of these investments. This limit, 4% of the total investment balance (taxable and tax-exempt), is plotted as the 4% Limit curve in Chart 1, Projections.

Growth Rate – The rate at which the combined investments, taxable and tax-exempt, are expected to grow. Historically, different investments grow at different rates; stocks grow at a different rate than bonds, and they both grow at a different rate than zero-risk instruments such as savings accounts, CD’s, and Money Market accounts. Enter an expected growth rate appropriate for your portfolio.

The calculator does not account for inflation. To include the effect of inflation, subtract the expected inflation rate from the growth rate.

Retirement Expenses – The expected amount need to cover all expenses for one year during retirement, federal and state income taxes excluded. The calculator assumes zero expenses as long as at least one partner has not yet reached the Target Retirement Age. In order to cover expenses, the calculator deduces the amount specified, plus income tax (see Future Tax Rate). These expenses are plotted as the Expenses curve in Chart 1, Projections.

In retirement, the calculator assumes that tax-exempt funds will be spent before taxable funds.

Currently the calculator does not support gradually adjusting retirement expenses upward to cover the effect of inflation.

Future Tax Rate – The expected federal and state income tax rate for the specified Retirement Expenses. By default the calculator uses the 2010 federal income tax table and a flat state 5% tax rate. Taxes could certainly change in the future. Enter your best guess if you do not wish to use the calculator default values.

Parts of the annual Soc. Sec. Benefits are taxable (up to 85%). The calculator automatically makes this deduction.

Projection Period

Starting Year – The year to start calculating. By default this is the current year.

Years to Calculate – The number of future years to calculate.

Advanced Tab

Asset Allocation

Portfolio Stock Allocation – Percentage of retirement portfolio allocated to stocks. Remainder will be allocated to bonds. The calculator re-balances the portfolio to this allocation annually. By default the calculator uses a 50/50 allocation (half stocks and half bonds).

Market Model

Stock Average Growth Rate – Expected average growth rate for stock investments. By default the calculator uses the historical value of 8%.

Stock Standard Deviation – Expected standard deviation for stock investments. By default the calculator uses the historical value of 16%.

Bond Average Growth Rate – Expected average growth rate for bond investments. By default the calculator uses the historical value of 1%.

Bond Standard Deviation – Expected standard deviation for bond investments. By default the calculator uses the historical value of 2%.

Average Inflation Rate – Expected average inflation rate. By default the calculator uses the historical value of 3%.

Inflation Standard Deviation – Expected average standard deviation for inflation. By default the calculator uses the historical value of 1%.

Control Buttons

Apply – Accept the current input values and run the calculator. When it finishes, the calculator will produce two charts: Chart 1 – Projection, and Chart 2 – Investment Growth. A summary of the calculations will be available via the Summary button.

Clear – Clear the charts (but not the input form) and recalculate.

Summary – Show a summary of the current calculator results (a summary is available after the calculator is run using the Apply button).

Save – Save the current results to disk (results are available after the calculator is run using the Apply button).

Help – Show a short version of this guide.

Exit – Stop and exit from the calculator.

Explanation of Charts

Chart 1, Projection

Savings – The annual Taxable and Tax-Exempt contributions to retirement funds (not the cumulative balance, which is plotted in Chart 2). These contributions stop when the individual reaches Target Retirement Age.

S. S. Income – The annual Soc. Sec. Benefits from both partners, after taxes have been applied (see Future Tax Rate). These benefits start when the individual reaches Soc. Sec. Age. They count as income and are subtracted from Retirement Expenses.

Expenses – The annual Retirement Expenses, plus taxes (see Future Tax Rate) and minus Soc. Sec. Benefits. Expenses start when both partners reach Target Retirement Age.

4% Limit – The safe retirement spending limit, set at 4% of the cumulative balance of investments (taxable and tax-exempt). The cumulative balance of investments is plotted as the Growth curve in Chart 2.

Overhead – The overhead incurred in order to take home the amount specified as Retirement Expenses. This overhead is due to taxes (and possibly early withdrawal penalties if distributions are taken from tax-deferred accounts before age 59 and 1/2). Beginning age 70, minimum required distributions must be taken from tax-deferred accounts. Taxes must be paid for these distributions, so if they exceed the specified Retirement Expenses, the additional tax would add to the overhead.

Ideally, this curve should be increasing (or at least flat) and should not remain below the Expenses curve for long periods.

Chart 2, Investment Growth

Growth – The cumulative balance in the retirement portfolio. The calculator models volatility in this projection. The thick, bright blue central curve represents the most probable growth path for the portfolio. The pink band around this central curve represents uncertainty for the projection due to volatility. The thin, multicolor curves represent alternate growth paths for the portfolio. Only 5% of these thin curves lie outside the pink band, which represents the 95% confidence level for this projection.

In retirement, the calculator assumes that tax-exempt funds will be spent before taxable funds, so the Tax-exempt curve should drop to zero before the Taxable curve. At any one year, the sum of these two curves, multiplied by 4%, represents the safe spending guideline. At the last calculated year, the sum of these two balances represents your legacy.