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About the Retirement Calculator

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The retirement calculator should be used as a tool to demonstrate the power of incremental returns in the market. If you show a monthly deficit, go back and slightly increase the rate of return (especially the pre-retirement rate) and observe the dramatic difference it can make.

This calculator should not be used solely as a financial guide for retirement as there are many other variables that will affect your results. It is designed to be an easy-to- use tool that accounts for the major variables.

How to use the calculator:

Enter a value for each of the 11 input boxes at the top portion. Most are straightforward but here are some explanations for those that may not be so obvious:

Input #4: Required retirement monthly income after taxes (today's dollars): Explanation: How much money would you need per month after-taxes if you were to retire today? Don't try to account for the value of the dollar at retirement, as that will be calculated for you. Use today's dollars.

Input #6: Current retirement money already saved/invested: How much money do you currently have saved specifically for retirement? Use all accounts such as existing IRAs, 401(k), Keogh or other tax-qualified accounts.

The calculator assumes you will make all future contributions at the end of each period (month, quarter, or year). Therefore if you have $5,000 saved today and are going to contribute $2,000 per year starting now, you should enter $7,000 as the current amount invested.

Input #7: Expected future contributions toward retirement: How much do you expect to deposit into your IRA (or other qualified accounts) per year? This assumes the deposits are made at the end of each year. If you are making them at the beginning, then you should account for that in Input #6.

Input #8: Expected annual % return on investments before retirement: What rate of return do you expect to make on your stocks, bonds, or other investments prior to retirement? Remember, the historical average for the U.S. markets is about 11%. The higher you move from this number, the less likely you are to attain it.

Input #9: Expected annual % return on investments during retirement: Will you shift to more conservative investments? If so, you need to account for it!

Input #11: Expected annual rate of inflation from now to retirement: The historical average for the U.S. is about 3% to 3 1/2%, depending on the periods chosen. Be cautious in choosing averages below 3%.

How the results are calculated:

1) Years to retirement: The difference between retirement age and current age.

2) Today's savings will be worth: The amount of today's savings multiplied by 1+expected rate of return raised to the number of years to retirement. If you have $5,000 saved and expect a 10% return over the next 20 years, it would be calculated as follows:

$5,000 * (1.10)30 = $87,247. Note: there may be some minor differences due to the way the calculator rounds.

3) Future savings will be worth: This is the future value of an annuity deposited at the end of each year. Please see "Financial Mathematics" for a full explanation.

4) Total value will be: The sum of today's savings and future savings.

5) Total principal invested will be: The total of all dollars you invested without and growth. If you have $5,000 saved today and invest $2,000 per year for 10 years, the principal invested will be $5,000 + ($2,000 * 10) = $25,000.

Your monthly after-tax income goal:

This field takes the amount you entered in "Required retirement monthly income after taxes in today's dollars" (Input #4) and finds the future value accounting for inflation. If you need $3,000 after-tax dollars per month and plan to retire in 30 years with expected inflation of 3%, you will need:

$3,000 * (1.03)30 = $7,281 per month. In other words, this amount is necessary in 30 years if you want it to have the purchasing power of $3,000 today.

Actual monthly income:

1) Monthly pre-tax income at retirement: This is the monthly distribution you can take that exactly depletes your total retirement funds over your life expectancy after retirement, assuming those funds grow at the after-retirement rate you chose in Input #8. The calculated value is the amount that amortizes the account over the life expectancy.

2) Monthly after-tax income at retirement: This takes the value found above and multiplies it by 1 minus the tax rate you selected in Input #10. For example, if you expect a 25% tax rate and can withdraw $5,000 per month before taxes, that will leave you with $5,000 (1-.30) = $3,500 after taxes.

3) Actual monthly income: This takes the monthly after-tax income found above and adds in expected Social Security benefits.

4) Difference between goal and actual: This is simply the difference between the goal found in "Your monthly income goal" and the actual amount you can withdraw from your retirement funds.

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