Simple Retirement Calculator

Sorry that I have not been posting much of late.  April is always rough for me.  Taxes play some role in April, because I get a certain amount of my tax data late, but the main reason stems from some charitable boards on which I serve, which meet in/near April.

One of the questions that came to me was how we could educate some of the workers to put away more of their income for retirement, because we don’t have a Defined Benefit plan.  After a little discussion, I said that I could give them good friendly advice.  As most committees go, when someone volunteers to solve a problem, discussion ends.

Now, what I have done is pretty simple, and violates one of my rules — I don’t believe in constant compound interest.  Markets don’t work that way, but for some perverse simplifying reason, retirement planning models do.

What I have done is create a model for retirement income, attempting to express it in terms that someone non-knowledgeable could understand.  You can download the Simple Retirement Calculator (free to download) that I created.

My base case assumes 3% inflation, pay keeps pace with inflation, and the real return on investing is 2% over inflation.  Other assumptions: one works for 45 years from age 25 to 70, and that the options for payout are limited to those that respect spouses and heirs.

So what can one 25 years old expect from saving over a 45 year period of time?

Savings Rate
Salary Replacement5%6%7%8%9%10%11%12%13%14%15%
J&S 100% Cash Refund22.9%27.5%32.0%36.6%41.2%45.8%50.4%54.9%59.5%64.1%68.7%
J&S 100% CR Indexed15.1%18.1%21.1%24.1%27.1%30.1%33.1%36.1%39.1%42.1%45.2%
4% year14.6%17.6%20.5%23.4%26.4%29.3%32.2%35.2%38.1%41.0%43.9%
Accum Years Ending Pay   3.66   4.39   5.13   5.86   6.59   7.32     8.06     8.79     9.52   10.25   10.99

This table expresses what is needed in order to have effective income during retirement.  The average investor can’t control asset returns.

J&S 100% Cash Refund -> Spouse gets 100% after death of annuitant, heirs get a payment annuitants got less than the lump sum value at retirement.  Indexed benefits increase at the rate of the CPI.

With a 2%% real return, it takes a lot of saving to replace current income in retirement, even over 45 years. Note that the real return assumption has the largest impact on the results.

Much as I think DB plans are superior to DC plans for the average person, most companies in the present environment will not subsidize a DB plan to the degree that will allow a person to retire at the same level of purchasing power that they had while employed.

There are many ways that I could improve the results of this model, but the improvements would only be incremental.  The main point of this model indicates that most people do not save enough, if all of their retirement outcomes rely on a defined contributions plan.

Let me know what you think  in the comments below.  Thanks.


  • Drizzt says:

    Hi David, i took the liberty of uploading your excel spreadsheet to google and share it out. My take is while excel is prevalent, an open spreadsheet where people can view and download is pretty good. the link is here >>

    do let me know if u disapproves.

    • Thanks for making the effort. You got caught in the spam filter; not sure why…


      • Drizzt says:

        i think i know why, everytime i didn’t login to wordpress, wordpress commenting system just farks it all up. thats why i hate the new commenting system

        great job. one of the best blogs out there littered with too much trading, index investing and dividend investing and not enough on bonds and fixed income.

  • cig says:

    I may be dense but the table presentation/labelling is confusing. It took me a while to guess what “accum years ending pay” might mean as well.

    I agree with the core message, and it’s always worth remembering people that compounding doesn’t have much of an effect when rates are low, but I’m puzzled with the assumption that “options for payout are limited to those that respect spouses and heirs”.

    It’s a niche market of people with spouses who can’t earn a living and whose kids have failed their lives so much that they’d benefit from a windfall in their fifties (the sort of age kids are when parents typically die).

    The more credible scenario is that kids or spouse need support because they lose their ability to support themselves through some misfortune, and so wouldn’t it be wiser and cheaper to cover for that via accident insurance — which will pay when the misfortune happens rather than having to kill the relative to trigger inheritance! — combined with more generous pensions that do not pay anything to the estate?

2 Trackbacks