Retirement Planner (Pro) United States

What the planner models

People often plan saving and spending separately. This tool runs both in one pass, so the pot you build is tested against the spending you intend to take from it.

It is a Pro tool. The year-by-year schedule across both phases is calculated on our server, and the summary figures are always shown.

Saving, one year at a time

From your current age to your retirement age, the balance earns your expected return each year and then your annual contribution is added. Growth stays invested, so the pot ends up well above the sum of what you put in.

That is why starting age matters so much. Money contributed at 30 has thirty-five years to compound; money contributed at 60 has five. Two people contributing the same total over a career, one early and one late, finish far apart.

Getting the contribution figure right

The model treats your annual contribution as money arriving in the account, so include everything that lands there, not just what comes out of your paycheck.

People most often leave out the employer match, and it is not a small omission. A dollar-for-dollar match on the first several per cent of pay is an immediate, guaranteed return, and leaving it out understates the pot for the whole projection.

The 401(k) employee deferral limit is $24,500, rising to $32,500 from age 50 with the $8,000 catch-up, and the catch-up is $11,250 for ages 60 through 63. Employer contributions come on top, and total additions to a defined contribution plan are capped at $72,000. An IRA adds $7,500, plus $1,100 from age 50. A health savings account can also serve as retirement savings: $4,400 for self-only coverage, $8,750 for family, with a further $1,000 from age 55. It is the only account with a deduction going in and tax-free withdrawals coming out when used for qualified medical costs.

Drawdown and the fixed spending assumption

At retirement the pot earns its return once a year and your annual spending comes out, until the pot can no longer fund a full year or you reach your life expectancy.

The spending figure is held constant and does not rise with inflation, so over a long retirement it buys steadily less. There are two ways to handle this. Enter the spending you expect to need in the middle of retirement, not at the start. Or use a real return, net of inflation, so every number in the model is in today's dollars and the flat spending figure means constant purchasing power.

The most useful output is the age, not the ending balance. Knowing your savings last to 82 is something you can weigh against your family history and plans.

Social Security is outside the model

The projection assumes the portfolio funds all of your retirement spending. In practice Social Security covers part of it, and how you claim changes the size of the gap.

Full retirement age is 67 for anyone born in 1960 or later. Claiming before then permanently reduces the benefit by five ninths of one per cent for each of the first 36 months early and five twelfths of one per cent for each month beyond that. Delaying past full retirement age earns delayed retirement credits of two thirds of one per cent for each month deferred, up to age 70.

Over the deferral period that adds up to a large difference in a lifetime, inflation-adjusted income. Because the benefit is guaranteed and indexed, delaying it is one of the few ways to buy protection against a long life without buying an annuity. The planner leaves Social Security out, so its result has a margin of safety built in. Check your earnings record while you still have time to correct it.

What else the numbers leave out

Every figure is gross. The projection does not model income tax, required minimum distributions from traditional accounts, Medicare premiums or their income-related surcharges, or the rules on when you can access each account without penalty.

That last point matters if you set an early retirement age. Distributions taken before age 59 and a half generally carry a 10 per cent additional tax, with exceptions that include separating from service with an employer in or after the year you turn 55, which covers that employer's plan but not an IRA. A projection that has you spending from a 401(k) at 52 is arithmetic, not a permitted withdrawal.

A worked example

Consider someone aged 40 with $100,000 saved, contributing $20,000 a year including the employer match, and assuming a 6 per cent annual return. Over the 25 years to retirement at 65, reinvested growth carries the pot far beyond the $500,000 of contributions.

At retirement they plan to spend $40,000 a year and want the money to last to 90. The drawdown phase tests whether that pot, still earning a return, funds 25 years of that spending. The planner returns either the years covered and the age the pot runs dry, or confirmation that it reaches 90 with money left. Retire at 67 instead of 65, or contribute $25,000 instead of $20,000, and the answer changes, so run it more than once.

Building in a margin

The model uses steady rates, and markets do not move steadily. Poor returns in the first years of retirement, while the balance is largest and you are drawing from it, do damage that later strong years cannot fully undo. A plan that only just survives on paper is fragile.

Run it with a lower return, higher spending and a longer life than you expect. If the plan still holds under all three, you can rely on it more. Revisit it as contributions, markets and circumstances change, and for decisions involving your actual accounts, taxes or Social Security, confirm the figures with a licensed financial professional who can see your full situation.

This is general information only and not financial advice.

About This Retirement Planner

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