1. Assumptions about your return rates...
Click the toggles below to find lots of useful information. Please read them!
1. What is your investment account return rate
This is your average annual return rate. It is
to note a few things here:
The stock market is not predictable - this has two major consequences:
put this number at 15% just because you’ve seen great returns over the past few years - there will be up years and down years, and anything above 10% is too over-confident and unrealistic.
Our calculation assumes that you see a consistent 7% return every single year, but in reality it is possible (even likely) that you’ll see a year or even a few years of huge losses (think 20-40% of your account value), which will cause you massive problems if you don’t have some buffer. I may update this model in a future version to account for this volatility and uncertainty. Look at
over the last 90 years in the S&P 500:
“Standard return”: this is
actual, pre-taxed returns, without accounting for inflation
. We adjust for inflation later by lopping off
, so just put here the actual return you’re estimating (i.e S&P 500 is up 15.5% this year, so if for some reason you think that it’d continue like that, you’d put 15.5% - this is totally incorrect by the way so please don’t do that). We assume that you are using a buy + hold strategy in order to minimize taxes, so we apply a long-term capital gains tax when you withdraw, based on income level.
To give you some context, here are the
over the last 35 years (these are also standard returns):
2. What is your retirement account return rate
Same comments as above, but normally a retirement account will include some lower risk, lower return, and lower volatility assets such as bonds or mutual funds. Here’s
on return rates of different types of portfolios (again, these are standard returns as defined above):
3. What is your bank account return rate?
to keep a certain amount of money in your bank account in case anything crazy happens - this is your survival money. The default return rate is 0 because banks have super low interest rates, but if for some reason you want to modify that feel free.
As far as how much money to keep in your bank account, the general advice is somewhere around
. But again, I’ll let you decide for yourself how many months of safety buffer you want to keep :
4. What inflation rate do you want to assume?
This image below is a good example of inflation. It’s defined by
as “the rate at which the the value of a currency is falling and consequently the general level of prices for goods and services is rising.” It means that everything will cost more in the future. In this model, everything you
is not inflation adjusted because those are the numbers we typically think in, but in the calculations, we reduce all incomes and returns by this inflation rate. The default is 2%, but you can input a different estimate if you find some other numbers that are more representative of your specific area/situation.
For example, the return rate above that you enter is the actual return rate you see in your stock app, not the return rate after accounting for inflation. See more info in
2. Let’s find the income needed to achieve your goals!
You need to adjust the sliders below until you get the
This ensures that you don’t ever run out of money, neither before nor after your retire.
Each slider is the
per year income increase
for each year in the period between start and end. Keep an eye on the chart, which will automatically update when you move the toggles: the ✅ turns into a ❌ if you run out of money. See the key assumptions below for how this actually can happen.
Withdrawals cannot be made from your retirement account
When you turn 59 1/2 (60 in our model), distributions are then taken from this account to cover your monthly expenses. Theoretically, you could take money out of your retirement account before this age, but you will be hit with a painful 10% penalty on the amount that you withdraw. Also, if you’re still working for a company with a 401K, you cannot actually take distributions from that specific company’s 401K until you’re retired, but we assume here that you have retirement funds from other sources (IRA’s, previous company 401K’s etc).
When you retire, you stop earning any income. The money you need to live your life has to come from your investment account and from your retirement account, depending mostly on age.
If you retire before 59 1/2
You must withdraw from your investment account until you turn 59 1/2. Each withdrawal from your investment account is actually made up of two parts: 1) the cost basis, this is how much money you put in originally, and 2) the capital gains, or how much more your money has grown since you invested it. The cost basis is untaxed because it was your money to begin with. The capital gains are taxed as long-term capital gains, since we assume that everything in your investment account is being held long-term (more than 1 year). See the reference table at bottom of this page for the long term capital gains table and an explanation for how that works.
Example of cost basis vs capital gains
You have $100 that grows 6% each year
You put $100 into your account, so your cost basis is $100.
After the first year, you now have $106 (growth of 6%): $100 of this is your cost basis, and $6 is capital gains. After the second year, you now have $112.36 (the $106 has grown 6%): again, $100 if your cost basis, and $12.36 is capital gains.
If after the second year, you decide to withdraw $50, how much of that is capital gains and how much is cost basis?
We first need to calculate the percentages: $100/$112.36 = 89% is cost basis, and 11% is capital gains.
We can now use these same percentages and apply them to the amount being withdrawn. 89% of $50 is $44.50 (cost basis), and 11% of $50 is $5.50. So you pay no taxes on the $44.50, and you pay capital gains tax on the $5.50 based on the long-term capital gains table.
After 59 1/2, our model assumes that you start to withdraw from your retirement account. We try to withdraw the full amount from you retirement account to cover your annual expenses. If your retirement account runs out of money, we withdraw from your investment account to make up the remainder. The full amount withdrawn from your retirement account is taxed as ordinary income, since you didn’t pay taxes on it when you put the money in (income tax is based on the reference tax table in
). As far as tax is concerned, this is
the most optimized way to do this - if you were to try to be smart, you’d split the amount you need to cover your expenses between your retirement account and your investment account so that you pay the least tax possible.
Starting at age 72, if you have money left in your retirement account, you are required to take
the minimum required distribution out of your retirement account. This is based on how much money you have in your account, so you could end up in a situation where you are
to withdraw a large amount regardless of how much you actually need. This is why we start taking distributions earlier to reduce the account balance and to control our tax situation more optimally (i.e we can take out only what we need). See the table at the bottom of the page for more info.
If you retire between 59 1/2 and 72
Between 59 1/2 and your retirement age, you continue earning an income. If your income is less than your expenses, we first take distributions from your retirement account to make up the rest (for the same reasons listed in the scenario above), and then we take from your investment account if needed.
After your retirement age, it becomes the same scenario as above.
You are required to take a minimum required distribution from your retirement account, regardless of how much you need. If this amount is less than your expenses, then the rest is also taken out of your retirement account (it is a minimum, so we can take more) if there is still balance remaining, and then from your investment account if necessary. If the minimum required distribution is more than your expenses, you still are forced to take out that amount - in this case, the excess withdrawn is invested into your investment account.
We assume linear transitions between the 3 zones of “Normal expenses”: your current situation, your 10 year dream situation, and your retirement situation.
We assume here that for the next 10 years, you slowly work towards your 10 year dream, linearly increasing or decreasing your expenses. We also assume that you live your dream life all the way up until 5 years before your retirement age, at which point you start linearly increasing/decreasing your expenses over the next 5 years, tapering towards your retirement lifestyle.
You always keep only the minimum amount of money in your bank account.
This is set by the option under the 3rd toggle in Section 1 above, which is the number of months of living expenses you keep in the bank.
How the difference between money earned and money spent on expenses is treated:
If there is excess money earned and not spent to cover expenses, that money is put into your retirement account if possible, and then your investment account. Revisit the note in
for the detailed explanation.
If there is a deficit (expenses are more than income), then the money comes out of your investment account, until you turn 59 1/2 (60 in our model). At the age of 59 1/2, the priority switches to the retirement account, and money is taken out of there first, with the investment account as backup if you run out of money in the retirement account. See second assumption above for more details on how distributions work after retirement.
Two scenarios for how you can run out of money:
If you’re younger than 59 1/2, and your investment account dips below zero, you are out of money. At this point, you could dip into your 6 month buffer in your bank account, but then you’d be violating your minimum bank balance rule. You technically could also dip into your retirement account, but this isn’t recommended because you’ll take the big 10% penalty.
If you’re older than 59 1/2, and both your investment account and retirement account go to zero, you are out of money. In our calculation, once your retirement account dips below zero, we try to take distributions from your investment account if there is still money left. However, when both accounts are depleted, you’re out of money (again, you still have a little bit in the bank but that doesn’t really count).
If you purchase a home, you stay it in forever.
Obviously your home will retain lots of value (likely increase but may decrease), but in this model we assume that you stay living in it and never sell it. In reality, you could sell it and recuperate your investment which would fuel your retirement for a few more years. If you want to model this in, you can simply use the alternative method below to manually add a one-time income for the amount you think you’d sell your house for, at the age you’d want to sell it at.
If the toggle is set to 3% for the period between 29 and 39, that means that my income increases by 3% every single year until I’m 39 years old. If I start out with an income of 100k right now, then my income at age 30 is 100k * 1.03 = 103k, and my income at age 31 is 103k * 1.03 = 106.09k, and so on...
: Salary increases earlier in life have much more impact than salary increases later in life due to the effect of compounding returns (the money you invest earlier in life has more time to grow).
: On the other hand, it doesn’t make sense to put the first toggle all the way to 5% because that is probably unrealistic and so doesn’t give you any meaningful info (unless you have concrete plan for how you will accomplish this for 10 years straight). I recommend starting with the earliest toggle, adjusting it to something that seems reasonable, then moving on to the next age bracket and so on. There is an alternative way to adjust your income manually if that seems more natural - see "
To make the numbers easier for you to wrap your head around, these are the real income increases (including inflation). What that means concretely:
that 5% bonus you just got gets put in here as a 5% increase, even though
was actually just from inflation (this
is subtracted automatically in the calculations).
% Income Increase Per Year
: the ability to add incomes or expenses manually to model temporary events like a new job with higher pay, sabbaticals or multi-year breaks with no income, or one time expenses like buying a car, another house, etc. Note that the toggles above will be still applied to the initial income.
all expenses should be positive (i.e a car you buy at age 30 for $20k should go into the age 30 row as $20k). If you buy a house with a mortgage, remember that you need to manually add the initial down payment but also all of the subsequent mortgage payments.
increases in income are positive, and income decreases are negative (i.e if you currently have a job making $50k per year, and you think that at age 35 you will get a new job that makes $60k per year, then for every year after age 35 you should put $10k into this column. If on the other hand it’s a new job that makes $40k, then you should put a -$10k into this column.
Annual Income (from working)
One-Time Income (pre-tax)
✅ Congrats, you won't run out of 💰!
For reference only: Graph of expenses and income with time
“Total Money to Live On” is defined as (all post-tax because that’s the money you can actually use to pay for things):
If you’re still working (not retired), then it’s your ordinary income + money from investment accounts if needed (i.e if your expenses are more than your ordinary income)
If you’ve stopped working (you’re retired), then it’s money from your investment account if you’re younger than 59 1/2, and money from your retirement account + investment account if needed if you’re older than 59 1/2
Excess money is still counted as “Total Money to Live On” even though in the model what actually happens is you put it back into your investment account - this is why in certain regions this line may be higher than the expenses line.
For reference only: Full spreadsheet with calculations (
look here if you want to check out the guts)
We assume that your investment account has only long term investments (held longer than 1 year). This has major tax benefits as opposed to short term investments, which are taxed as ordinary income.
Long term capital gains are
if you stay below a certain income.
Long term capital gains are
, and your ordinary income is taxed first, which means that long-term capital gains and dividends which are taxed at the lower rates
push your ordinary income into a higher tax bracket. See example below for more clarity.
You are a single filer, and your ordinary income is $35,400, which is $5,125 under the 22% tax bracket (that is, you have $5,125 more room left in the 12% bracket)
You have a $10,000 long-term capital gain
For long-term capital gains, you pay 0% up to income of $40,400. Therefore, you pay 0% on your first $5,000 of the gain (from $35,400 up to $40,400). The second $5,000 (which
put you into the 22% bracket if it were ordinary income) gets taxed at 15% because it follows the long-term capital gains table. But remember: your ordinary income remains in the 12% bracket!
For reference only:
start taking distributions from your retirement accounts at age of 72. These distributions are taxed at ordinary income. There is a different table to use for if your spouse is the only primary beneficiary and he/she is 10 years younger than you, but I’ll let you look into that on your own if it’s relevant.
Minimum retirement distribution = account balance
life expectancy factor
for life expectancy factor
There are no rows in this table
👉 Have a scenario that you’re happy with? :