User Guide

REST User Guide

The Retire Early Scenario Tool (REST) combines key retirement information to help plan for retirement. After entering your current savings, REST provides knobs to explore pathways to your retirement goals. To use it, follow these steps:

1. Entered Tax Assumptions. The default tax assumptions were set based on the federal tax incentives for a married couple. These can be changed for a single person, or if you want to include other taxes, by clicking on the "Tax Assumptions" link at the top.
2. Enter Present Status information. This defines the period before early retirement (ER) age, and assumes you have health insurance through your work. Enter Account principles and annual contributions by type.
   • Pre-tax Accounts (Traditional) include types such as 401k or 403b, which do not have tax applied until you withdraw from them. This type of account can reduce total taxes if your income is greater during your working years than in retirement.
   • Post tax Accounts (Roth) were created with income that has already been taxed, so its withdrawals are not taxed. This type of account can reduce taxes in retirement if you earn more during retirement than working years.
   • Pre-tax No Early Withdrawal Penalty (457) accounts have no early withdrawal penalties. Other accounts have a 10% penalty for withdrawals before age 59.5. Therefore, this can be advantageous for early retirement.
   • Cash has the advantage of not having early withdrawal penalties or tax applied. It has a significant disadvantage in interest. REST assumes cash earns no interest. Cash and pre-tax 457 accounts are used first in REST to help reduce taxes and penalties, and maximize interest earnings.
3. Enter Early Retirement (ER) information. This is the period where you may have "retired" from your career, but may still have some income streams. Enter:
   • Age is the age that early retirement starts. It signals the start of annual work income and ends contributions toward retirement accounts.
   • Annual Health Insurance Cost. A constant can be used, or by checking the box, a relationship between income and health insurance cost can be used. This allows you to change your "Monthly Spending" in the simulation section and capture how insurance rates increase with income. Data for that relationship can be retrieved from the affordable care act website (https://www.healthcare.gov/lower-costs/).
   • Annual Work Income is the amount you make during early retirement. This ends at the "Fully Retired" specified age.
   • Lump Sum Income is a one-time amount of income, such as an inheritance or income from downsizing a house.
   • Lump Sum Year is the year that the Lump Sum Income is received. While it resides in the early retirement section, it can be specified for a year during full retirement.
4. Enter Fully Retired information. This is the period that you really retire. You stop working and enjoy other things in life.
   • Age: This is the age that you stop working, and early retirement work income ends. Lump sum income can still occur.
   • Social Security Start Age is the age that social security starts. It influence the amount of social security when using the Monthly Social Security relationship chosen with the checkbox. It captures how the social security payout goes up as you delay payment. While delaying payment increase the annual amount, it potentially reduces the additional interest you may earn earlier on.
   • Monthly Social Security is the amount of social security benefit at 62 in today's dollars. The data is available at the social security website accessible through the label's link. Check the box and define the relationship between the amount and your early retirement age to make the value update when exploring early retirement age options.
   • Monthly Medicare Addition (>=65) is the amount you anticipate needing above what medicare covers.
   • Annual Pension is the amount of pension you would expect to receive starting at age 65. By checking the box, a relationship between the amount and your early retirement date can be created to capture greater pension levels the longer you work in your career. The amount should be adjusted to today's dollars, which can be done with the calculator available through the age vs. pension input table.
   • Life Expectancy (Age) is used to specify how long you want your savings to last. It defines the end year on the charts, and is used to estimate success or failure rates in market simulations.
5. Simulation. The Simulation section defines the scenario. There are two options to specified the interest rate used:
   • Annual Interest Rate. A constant real (nominal interest minus inflation) annual interest rate. The average long term S&P 500 is about 6.7%. Some analyses suggests that using a 4.5% represents a worst case scenario.
   • Market Sim Start Year. The sequence of historical interest rates from the S&P 500 starting from the specified year. For market simulations, when REST gets to the final historical year, it start over from the first year of data.
   • Monthly Spending. The amount of money needed after the start of early retirement outside of health insurance, taxes, and penalties. It's your spending budget.
     • Auto Solve calculates the maximum amount that you can spend until your life expectancy age. This options is useful for exploring how different inputs impact your spending amount, rather than looking at how inputs impact your principle.
6. Results Chart. The results chart has five tabs:
   • Principle. Shows the total principle and individual account principles through time. It also shows the interest rate used through time. This chart shows if you run out of money during retirement, or how much extra you maintain.
   • Pathways. The Pathways tab shows different pathways to achieving your spending goal if you are falling short in a stacked bar chart. The grey represents the current setting; the blue the additional amount to meet your goals. The pathways include:
     • Work Contributions; additional contributions to retirement accounts.
     • Early Retirement Wait Years, or number of years to continue working.
     • Early Retirement Income, or additional income needed in early retirement.
     • Lump Sum addition.
   • S&P 500 Simulations. This tab simulates the time series of historical S&P 500 data starting at different years. When REST runs out of data, it starts over at the first year of data. After running all of the time series, it outputs the percentage of simulations that successful in maintaining money until the specified life expectancy age.
   • Cash Flow. The cash flow tab shows the details of monetary inflows and outflows.
   • Today's Market. This tab tries to find S&P 500 conditions that are similar to recent trends. For example, if recent average returns were 8%, it finds other market start years that also had average recent returns near 8%, and simulate from there.

Notes

• REST works best for single individuals or married couples who are close in age.
• REST provides more understandable results by using today's dollars, which means they are not adjusted for inflation. For example, when it shows a future principle of $1 million, it has the same worth as it does today. Including inflation would show a much higher number, but it's value would be misleading because it doesn't have the same spending power.