Putting it All Together
Retirement planning can be thought of as consisting of two phases:
- The accumulation phase -- saving for retirement
- The distribution phase -- living in retirement
Note: For a quicker estimate of how much you'll need to save, see the graphs in How Much Money Will You Need to Retire?, What Percent of Your Salary Should You Save For Retirement? (by starting age), or percent to save with higher incomes.
A Consolidated Retirement Accumulation & Distribution Plan
The graph above shows a retirement plan for a 35 year old, Alex, who hopes to retire at age 65 and live to age 90 (click on graph to expand it. See the end of the post for a link to the spreadsheet). Alex has no savings yet, but is planning to save 13 percent of salary from now on. Alex plans to put 3% of pay into taxable accounts and split the remaining 10% equally between
a tax-deferred employer-sponsored 401k and a tax-free Roth account. (For a full description of this scenario, see the appendix at the very end of this post.)
The graph shows the accumulation of savings up until age 65, followed by withdrawals. Withdrawals are assumed to be made first from the taxable account (light blue), then the tax-deferred 401k account (medium blue), and finally from the tax-free Roth account (dark blue). Note that the balance in the Roth account goes to zero before Alex is 90 years old. The bright red slice is an estimate of the additional savings Alex would need in order for the savings to last until age 90.
Start Planning Retirement Early
This graph suggests that, under reasonably conservative assumptions, saving 13% of your income may not generate enough retirement savings if you wait until age 35 to start. Note, however, that if Alex were lucky enough to have an employer who provided a pension and matched 401k contributions up to 3% of employee salary, the situation would be remarkably better. Waiting until age 67 and receiving full social security benefits would also make a significant difference. (Note: for more on the importance of getting an early start, see Start Investing When You're Young).
How to Use Traditional Retirement Planning Calculators More Effectively
Traditional, so-called "deterministic," calculators/spreadsheets like this one help to identify the fundamental inputs to retirement planning, and the basic calculations and issues involved. In fact, this is a modified version of the spreadsheet I developed to do my own retirement planning early in my career. However, they must be used with care. In particular, I think it is important to be conservative in your assumptions regarding stock market returns -- especially if you are near, or in, retirement. To understand why, see Don't Plan Retirement Assuming Average Stock Market Returns, or The Variability of 20-Year Stock Market Returns, in Dollars.
Related MaterialsMy SIMPLE Retirement Savings Calculator/Spreadsheet: my simpler, "back-of-the-envelope" approach to calculating how much you need to save; links to easy-to-use graphs to determine how much you'll need on your retirement date, what percent you need to save, how much you should have by age, etc.
How Long Will I Live? One of the most vexing issues in retirement planning.
Build Your Own Pension Using Immediate Annuities: An increasingly popular component of retirement plans.
How Much Money Will You Need to Retire? for a discussion of the "needed savings" section of the current spreadsheet
What Percent of Your Salary Should You Save? for a discussion of the "planned savings" section of the current spreadsheet
100 Years of Inflation History: Inflation if one of the biggest threats to retirement.
Retirement Spending & Income Plan adds the income calculation to the model.
Do You Need a Personal Strategic Plan? to help you set goals and establish priorities.
Link to SpreadsheetHere's the link to download the Excel spreadsheet: The Observations Retirement Planning Spreadsheet (version 3). If you have any problems accessing or using the model, see this post. Fundamentals of Investment Valuation introduces the fundamental calculations.
Some Other Retirement Planning LinksSocial Security Income Estimator : the official site. For an approximation, see this site.
Many versions of Quicken include a basic retirement calculator (see Planning - Financial Calculators in the Quicken menus)
The calculator at Bankrate.com is similar.
Other SpreadsheetsInflation Calculator: calculates inflation rate between any 2 years, and converts dollars to equivalent purchasing power.
Planning to Buy a House Spreadsheet checks proposed purchase against home affordability guidelines.
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Copyright © 2009. Last modified: 12/28/2012
AppendixFollowing is the detailed input to the Excel spreadsheet used to produce the graph above. (Click to expand)
Note: Click on the above screenshots to expand them. The link to download the Excel spreadsheet is above.