The gross amount one receives from employment (if planning for retirement) or received in the last year prior to retirement (if already in retirement) in the form of wages, salaries, bonuses, self-employment income and the like. It does not include income from interest and dividends.
The tool uses this annual pre-tax earned income to provide an estimate of both future Social Security benefits (if planning for retirement) or current Social Security benefits (if already in retirement) and the amount of income the individual can expect to need in retirement to support the expected or current annual retirement spending goal. For those planning for retirement, if current earnings are not typical of a normal year, a more representative amount of earned income should be used. For those in retirement, if earnings in the last year prior to retirement were not typical for a normal year, a more representative amount of earned income should be used.
The estimated (if planning for retirement) or current (if already retired) amount of pre-tax annual income you need to cover both your essential and your discretionary expenses in retirement. The tool defaults to 70% of current household annual earned income (if planning for retirement) or 70% of annual income in the last year prior to retirement (if already retired).
This tool provides only a rough estimate of future Social Security benefits based on current annual pre-tax earned income. If you'd like to see a more precise estimate based on your actual earnings history, go to www.socialsecurity.gov and use the online Retirement Estimator or, if you are age 60 or older, refer to your most recent statement provided annually by the Social Security Administration.
The Social Security benefit used here is the "primary insurance amount" (PIA), the benefit received at normal or full retirement age.
In using this formula, the tool assumes:
Spouses are eligible to receive 100% of their earned benefit or 50% of their spouse's benefit, whichever is greater. In this tool, both spouses must be age 67 or greater in order for one to be eligible to receive the spousal benefit.
For purposes of calculating the spousal benefit, the tool does not distinguish between "spouse" and "partner". As a result, the tool will calculate a spousal benefit for a non-working or substantially lower income "partner" even though under federal law, a partner is not eligible to receive any such benefit. Users are encouraged to use an estimate of Social Security benefits obtained from the Social Security Administration as explained above in the paragraph Social Security Benefit.
Pension income payments are assumed to begin at age 65 whether an individual is still working or not and remain fixed over one's lifetime.
Other income for both the primary user (i.e., the individual completing the tool) and spouse or partner, if applicable, is assumed to start the year of the expected retirement age or the user's current age, whichever is later. Other income amounts remain fixed over the selected duration. If the amount of other income is expected to increase during retirement, select an additional input of other income and include the increased amount with its respective duration.
The tool identifies six investment mixes comprised of three different asset classes – stocks, bonds and cash. The mixes represent different investor profiles depending upon the investor's investment objectives and risk tolerance. The investment mixes range from aggressive to preservation as depicted in the chart below. The more aggressive the portfolio, the higher the potential risk and the higher the potential return. Conversely, the more conservative the portfolio, the lower the potential risk and the lower the potential return. Diversification may reduce but cannot completely eliminate the risk of investment losses.
When you are planning for retirement, the tool assumes all current and planned retirement investments (i.e., contributions) earn a hypothetical fixed rate of return of 6.5%. The 6.5% rate of return is lower than historical averages in order to be more conservative and factor in any potential investment fees and expenses, but not federal or state income taxes.
Once in retirement, current and planned retirement investments for both the primary user and his/her spouse or partner will earn a hypothetical rate of return equal to the selected retirement investment mix of the primary user. (See above chart.)
The tool assumes both a stable portfolio performance and an unstable portfolio performance. The stable portfolio performance scenario assumes a hypothetical straight rate of return throughout retirement. Although returns are typically not straight and fluctuate over time, the hypothetical straight rate of return reflects the average of the historical rates from 1950 to 2021 for a selected investment mix. The hypothetical straight rate of return is lower than historical averages in order to be more conservative and factor in any potential investment fees and expenses, but not federal or state income taxes. The table below reflects the hypothetical straight rates of return for each of the six investment mixes.
|Hypothetical Rates of Return of Stable Portfolio Performance|
|Hypothetical Stable Return||Historical 1950-2021 Total Return %||Historical 1950-2021 Highest %||Historical 1950-2021 Lowest %|
The unstable portfolio performance scenario depicts a scenario where the market falls early then progressively increases in retirement but has the same overall return as the stable market performance. The rates of return used under the unstable portfolio performance scenario for each of the six investment mixes are:
|Hypothetical Rates of Return for Unstable Portfolio Performance|
|Years into Retirement||Aggressive||Growth||Balanced||Moderate||Conservative||Preservation|
|Total Unstable Hypothetical Return||8.00%||7.50%||7.00%||6.50%||5.50%||3.50%|
The tool subtracts an assumed inflation rate of 2.25% from the annual rate of return so that the effect of inflation is reflected in the final results, which are expressed in terms of current or today's dollars.
Total Retirement Assets is the amount of money a household has to spend during retirement based on the accumulated retirement assets at retirement. An asset is anything with commercial or exchange value owned by a business, institution or individual. Examples include cash, real estate and investments. The tool starts with the Annual Retirement Spending Goal and subtracts Social Security, pension and other income received during retirement (if indicated in the tool) to determine what amount should be withdrawn from Retirement Savings. If your Social Security, pension and other income meets or exceeds your Annual Retirement Spending Goal, no withdrawal from Retirement Savings will occur.
For those planning for retirement, the maximum age of the Changes in Retirement Assets Over Time graph is calculated 30 years from the Retirement Age for primary user. For those already retired, the maximum age of the Changes in Retirement Assets Over Time graph is calculated 30 years from the current age for primary user.
All dollar amounts are shown in today's dollars.
For the purpose of this tool, "Planning for Retirement" means currently working full-time in your career / job. "In Retirement" either means you are currently working but plan to retire this year, or you are already retired from your full-time career / job but may still include part-time work to supplement your income needs.