A Retirement Planning Calculator / Spreadsheet
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
In the previous two posts in this series, we looked first at establishing a target for the savings needed to cover expenses during the retirement years, and then at creating a savings plan to reach that target. In this post, we'll add some enhancements to our retirement planning Excel spreadsheet in order to create a consolidated accumulation and distribution plan -- we'll put it all together. This, in turn, will give us a foundation to do some additional analysis in future posts. (See the end of this post for a link to the spreadsheet.)
A Consolidated Retirement Accumulation & Distribution Plan
Consolidated Retirement Saviings Accumulation & Distribution Plan
- The graph above (click on it to expand it) shows a retirement plan for a 35 year old, Alex, who hopes to retire at age 65 and live to age 90. 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 Basic Retirement Planning Calculators More Effectively
Simple, so-called "linear," 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.
Source from http://observationsandnotes.blogspot.com
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