5 Ways to Calculate Retirement Numbers

By Justin Pritchard, CFP®

How much will you be able to spend in retirement? The best way to figure that out is to run some numbers. You can calculate your retirement income in several ways, and each approach has pros and cons.

You can’t predict the future perfectly, but calculators and online tools can help as you explore the possibilities. You’ll learn more about your situation and how retirement works with each tool you use. For instance, you might uncover some risks and identify the most critical aspects of your plan.

Continue reading below, or get similar information from this video.

Focus on Savings

Retirement income calculators primarily look at withdrawals from your savings. That’s because you likely already know how much you’ll get from Social Security, a pension, and other sources. The big unknowns are how much you’ll earn on investments, how long you’ll live, and what surprises arise. As a result, you need to figure out how much you can safely spend from your assets.

So, a first step is typically to start with your desired spending, and then subtract the amount you’ll get from guaranteed income sources:

  1. How much do you want to spend each month or year?
  2. Subtract income from Social Security or pensions.
  3. The result is the target amount to withdraw from your savings.

Waterfall chart showing withdrawals needed after accounting for income

That said, some people don’t really know how much they want to spend. Instead, they just want to know how much they could spend with the resources available. Fortunately, you can also run calculations to get those answers.

Spreadsheet Formulas

A traditional approach for calculating retirement numbers is to do a handful of calculations with a spreadsheet or financial calculator. Step-by-step, you can project how things might unfold and get answers.

For example, you might back into the calculations by starting with your spending goal.

If you know how much you want to pay yourself each month or year, a present value (PV) calculation does the trick. You can arrive at a lump sum of money needed to support the payments you want.

Once you know how much you’ll need at retirement, you can also figure out how to reach that goal. For that, a payment (PMT) calculation might be appropriate. You start with the money you have currently, an assumed rate of return, and the number of years until you want to retire. With those inputs, you can find out how much to save each year toward retirement.

Of course, you’ll likely need to adjust things for inflation. That’s where a future value (FV) calculation comes in handy. For instance, if you want to withdraw $50,000 in today’s dollars, you’ll need to withdraw more than that in the future for the same purchasing power you get out of $50,000 today.

For things to work out, you need to earn at least as much as you assume in your calculations. The reality is that market returns fluctuate, and sometimes you lose money. Ideally, you might recover from losses before they cause problems. While this aspect is true of any calculation strategy, it’s worth highlighting when you can just type in any investment return you want.

Download a sample spreadsheet (shown in video above) with calculations.

Pros and Cons of Basic Calculations

Advantages:

  • Easy to make quick changes to inputs like inflation or growth rates
  • Complete visibility and control over the assumptions.
  • Everything on a single spreadsheet
  • Can be robust and elegant with time and skill

Challenges:

  • Easy to make mistakes on spreadsheets
  • Assumes flat-line inflation and returns
  • Doesn’t paint a picture of how things might look
  • Only covers what you remember to calculate (not necessarily moving through tax rates, IRMAA, Social Security taxation, annual inflation adjustments, etc.)

How to Calculate Taxes

You may need to adjust your numbers for after-tax spending. For instance, if you want to spend $50,000 from your savings each year, you might need to withdraw more than that when the money comes from pre-tax retirement accounts. To do so, divide the amount you want to spend by one minus your assumed tax rate.

Example: You want to spend $50,000 from your pre-tax IRA, and you plan to pay taxes out of that account as well. You believe your total tax rate on those additional withdrawals will be 15%.

Solution:

  • Divide the amount you want to spend one minus the tax rate.
  • 1 minus 15% (or 0.15) = 0.85.
  • $50,000 divided by 0.85 = $58,824.
  • You might plan to withdraw roughly that amount from the pre-tax IRA to fund your spending.

This is an oversimplification, and it doesn’t recognize how different types of income might affect your taxes, but it’s better than ignoring taxes.

Spreadsheet Cash Flows

Sometimes, it’s nice to see year-by-year cash flows as you calculate retirement withdrawals. Walking through each step helps to illustrate what’s happening and to set your expectations. The simple calculations above tell you answers, but you don’t see how things unfold.

Fortunately, you can build a spreadsheet model that calculates your retirement income and other details over time. But the model might not just spit out answers. Instead, you probably need to test different scenarios and look for issues.

For example, you might assume you’ll have $600,000 saved at retirement and wonder how that will work out. Perhaps you also get Social Security income, and your savings will supplement that income.

A basic model might start with the following:

  1. Begin each year with your starting balance
  2. Subtract the amount you want to withdraw each year (possibly with taxes)
  3. Apply a growth (or loss) rate to the remaining funds to arrive at your year-end balance
  4. Copy the year-end balance to the next year’s starting balance and repeat

That type of model might look like this in it’s most basic form:

Screenshot of a spreadsheet with year by year cash flow calculations of retirement income and assets

Remember to account for taxes. To do so, you might:

  • Add a column for your tax calculation, or
  • Increase your withdrawal to cover taxes

Pros and Cons of Spreadsheet Cash Flow Calculations

Advantages:

  • Visualize how things might unfold
  • Spot-check visually for potential errors or unexpected results
  • Manually change things at any point in time (throw in occasional market crashes, spending changes, etc.)
  • Can get as complicated as you want

Challenges:

  • Doesn’t always just tell you the answer
  • Easy to make errors that affect everything downstream
  • Manual guessing on tax treatment

Withdrawal Rates

Withdrawal rates are a popular topic for calculating retirement spending. For example, the so-called “4% rule” suggests that your money might last 30 years if you start by withdrawing 4% of your savings at the beginning of retirement.

To use a withdrawal rate, multiply the percentage you want to withdraw by the amount of assets you have. You might or might not repeat that calculation each year in retirement.

For example, under the traditional 4% guideline, if you retire with $1 million, 4% of that is $40,000. So, that’s how much you might withdraw in your first year of retirement. In every following year, you’d increase your withdrawals to match inflation.

The research behind that guideline assumed a portfolio of 50% stocks and 50% bonds, and adding diversification can potentially improve things.

The 4% guideline was never meant to be a rigid rule for calculating your retirement income. Instead, it was a research project to figure out what withdrawal rate would have survived historical worst-case scenarios. But people often use that number, as they (understandably) want to avoid running out of money in retirement.

However, you might not experience such difficult times.

Keep in mind that in many of those historical cases (depending on when your retirement started), you were underspending if you followed the 4% rule. So, there’s always a tradeoff. A rate that’s too high can cause you to run out of money or require that you cut spending at some point. A rate that’s too low means you could have spent more or retired earlier. Unfortunately, there’s no way to know the perfect rate in advance.

Ultimately, nobody really uses rigid withdrawal rates because life isn’t that tidy. You might have higher spending in certain years, such as when you need to replace a roof. Plus, you might start at a high withdrawal rate in the early years of retirement and then dramatically reduce that rate once you claim Social Security.

Pros and Cons of Calculating With Withdrawal Rates

Advantages:

  • Quick and easy way to estimate
  • Easy to communicate, which might explain the popularity
  • Not necessarily bad for ballpark estimates

Challenges

  • Doesn’t reflect spending reality
  • No adjustments over time (other than inflation)?
  • Ignores taxes
  • Might (or might not) cause underspending if things go well

Monte Carlo Analysis

Monte Carlo analysis involves calculating the odds of success for your retirement plan.

You can build a detailed plan and include various assumptions. For example, you’ll enter expenses like healthcare, taxes, essential and fun spending, and more. Then, a computer program simulates how your investments might perform in the future.

The most interesting feature of Monte Carlo analysis might be the ability to randomize your investment returns. You don’t know what will happen, so it’s wise to anticipate a broad range of outcomes. Things might go well, or they might go badly.

A major risk for retirees is “sequence of returns risk.” This is the risk of experiencing large losses in your portfolio early in retirement. Those early losses can cause significant damage to your portfolio, as every time you withdraw money, doing so takes a larger bite out of the portfolio than you’d see if markets were higher.

Monte Carlo helps to evaluate how bad timing might play out.

For example, a Monte Carlo analysis might generate 1,000 different simulations. The concept is similar to getting dealt 1,000 different hands of cards. Some of them are good, some are bad, and some are somewhere in between.

Odds of Success

Monte Carlo tells you what percentage of cases are “successful,” meaning your account balances don’t reach zero. But that definition (“odds of success”) is problematic.

Ability to adapt: Perhaps most importantly, Monte Carlo ignores the fact that you’ll probably notice if your accounts are losing money quickly. If that happens, most people will consider making changes, to the extent that’s feasible. For instance, they might reduce spending somewhat until markets recover, which can help substantially.

Complete failure? There’s also the question of what failure means. If your accounts run out of money, that’s not a good thing, but you might still have income from Social Security, equity in your home, and other resources that can help you pay expenses. Things will be more difficult, to be sure, but you’re not necessarily destitute. If you fall short by one dollar the day before your projected death, Monte Carlo calls it a failure, but that doesn’t sound so bad.

Lack of detailed guidance: Traditional Monte Carlo analysis doesn’t tell you exactly what you need to do to improve your chances. Of course, spending less is an obvious solution, but how much less? You typically need to guess what numbers might be appropriate and check the results instead of just getting an answer. Some planning tools address this shortfall, although they don’t just use traditional Monte Carlo.

What level is right? It’s tempting to aim for 99% or 100% odds of success. While 100% is virtually impossible, it might also be problematic. If there’s almost no chance of failure, then it’s almost certain that you’re spending less than you could spend or working too long.

Pros and Cons of Monte Carlo Analysis

Advantages:

  • Enter detailed expenses and customized assumptions
  • Get a reasonable idea of whether or not your plan might work
  • Runs what-if scenarios (specific to investment performance)

Disadvantages

  • Ignores the reality of retirees adjusting to adversity
  • Pass/fail framework
  • False sense of precision

Dynamic Withdrawals

You can potentially improve traditional withdrawal approaches by using a dynamic spending strategy. With that approach, you don’t spend at a single rate throughout retirement. Instead, you respond to changes and calculate an acceptable level of retirement income each year.

In some cases, you increase spending. In other cases, you need to reduce withdrawals.

A primary benefit of dynamic spending approaches is the ability to start spending at a higher rate.

For instance, the traditional 4% rule suggests a withdrawal rate of 4% of your assets when you retire. Some have proposed even lower “safe” withdrawal rates in the past. However, dynamic strategies often start with higher withdrawal rates in the 5% range or higher.

Guardrails are a popular form of dynamic spending. With that approach, you decide in advance what conditions would cause you to reduce or increase spending. Those predefined levels are guardrails, and hitting a guardrail triggers a change.

For example, if there’s a significant market crash, your assets might lose so much value that you hit a lower guardrail. When that happens, you reduce spending (at least temporarily). But things can also go well. If your assets continue to grow, you can give yourself a raise with a reasonable degree of confidence.

Output from a retirement guardrails program showing when spending should increase or decrease

Other ways to adjust spending include skipping inflation adjustments when markets fall, following life expectancy calculations, or any other method that works for your plan.

Pros and Cons of Dynamic Withdrawal Strategies

Advantages:

  • Start with higher withdrawal rates than otherwise
  • Adjustments can help your savings last longer
  • People often do it naturally

Challenges:

  • Unpredictability in future spending
  • Cuts might be more drastic than you want