How does it work?

REST calculates how your savings change over time based on your inputs. It solves for the withdrawal needed to provide all the expenses for that age period.

  1. During working years, it adds interest and contributions for each account.
  2. During early retirement, it solves for the withdrawal rate needed for the specified monthly spending. The withdrawal is reduced by interest earned, early retirement income, and lump sum income. The withdrawal is increased by expenses including health insurance, early withdrawal penalties and taxes.
  3. The fully retired period changes at several ages. It starts the same as the early retirement period, other than excluding the early retirement work income, until reaching the social security age and 65. At the social security age, withdrawals are reduced by the social security amount. At 65, health insurance cost expires in place of medicare, adjusted by the medicare addition specified, and pension kicks in. When income exceeds expenses, the extra goes into the cash account.

In more detail, REST calculates:

  • Contributions and interest while working.

Starting at the early retirement age, it calculates:

  1. Interest: Interest for each retirement account (other than cash) is calculated with the annual interest rate specified or the market simulation interest rate. This is added to the principle for the next year.
  2. Withdrawals
    1. Total withdrawal. This is the amount you have to withdraw each year to meet your desired spending level. It has to find this value because some outflows changes as a function of withdrawal such as taxes, penalties, health insurance.
    2. Pre-tax no early withdrawal penalty (457) withdrawal. REST withdraws from this account first to minimize early withdrawal penalties that occur before age 60. Previous year interest is used before the principle is withdrawn. If there is enough cash, it will limit this withdrawal to the first tax bracket to maximize the early withdrawal penalty benefit.
    3. Cash withdrawal. REST withdraws from this account next to minimize early withdrawal penalties, taxes, and health insurance (which goes up with income).
    4. Post tax withdrawal (Roth).
    5. Pre-tax withdrawal (Traditional).
  3. Incomes
    1. Early retirement income. This helps reduce withdrawals in early retirement.
    2. Lump sum income. This is a one time amount, such as an inheritance. It reduces withdrawals, with any extra going to the cash account.
    3. Social Security. This is calculated based on user inputs as a function of age. Estimates can be retrieved from the link to the social security website provided in the tool next to the input. It also reduces withdrawals.
    4. Pension. This is calculated using the constant input or as a function of early retirement age as input. It also reduces the withdrawal amount.
  4. Expenses
    1. Health insurance. This is calculated using the constant input or as a function of income as defined in the inputs. It adds to the withdrawal requirement after working if not supplied by income.
    2. Medicare addition. Medicare addition expenses replace health insurance after age 65.
    3. Early withdrawal penalty. This is a 10% penalty of the withdrawal from retirement accounts (other than 457) before age 60.
  5. Taxes
    1. Total taxable income. The sum of pre-tax 457 withdrawal, pre-tax (traditional) withdrawal, early retirement work income, lump sum income, social security income, and pension.
    2. Taxes. These are based on the amount of the total taxable income and the input tax assumptions.
  6. Spending.
    1. Total income. The sum of the total retirement withdrawals, cash, early retirement income, lump sum income, social security, and pension.
    2. Expenses. The sum of health insurance in early retirement, medicare additions in full retirement, early withdrawal penalties, and taxes.
    3. Monthly spending. Total income minus total expenses. This is the amount available to spend above health insurance or medicare additions specified. The total withdrawal is varied until the monthly spending is equal to what is input by the user.
  7. Contributions: Each retirement account contribution is added to it's corresponding principle before early retirement.