TITLE: LIFETIME INCOME WORKSHEET – FUTURE RETIREMENT WITH COLA WITHDRAWAL

PURPOSE: CALCULATING RETIREMENT FUNDING WITH INFLATION ADJUSTMENTS

SCOPE: This worksheet focuses on lifetime income calculations from a “goals based” perspective. That is, looking at the retirement lifestyle you want, and showing you how to calculate what you would need in personal assets, not just retirement funds, to be able to fund your desired future lifestyle.

LIFE STAGE: You are more than one year from planned retirement.

INTRODUCTION: This calculation employs two steps. Example data is used below. Your data will be different.

Step 1 is to calculate your desired initial annual income at the start of your planned retirement, while considering likely increases in the cost of living (inflation) between now and then.

Step 2 is to calculate the total investments needed to fund that level of spending, adjusted (or not) for inflation through your assumed retirement years.

CALCULATIONS:

Step 1: Suppose the following are your lifestyle costs in CURRENT dollars:

SPENDING CATEGORY ANNUAL AMOUNT
Housing costs $15,000
Food and sundries $8,000
Transportation $8,000
Clothing $2,000
Health costs $8,000
Fun $7,000
Miscellaneous $2,000
TOTAL $50,000

Assume an annual inflation rate of 4% a year, and your goal is to start retirement in 15 years. To calculate the estimated, inflation-adjusted cost of living for your first year of retirement, using the Choosing Wealth™ Calculator do the following:

1.   Enter 50000, the estimated current cost of living, and select  
2.   Enter 4, the assumed annual inflation, and select  
3.   Enter 15, the assumed years until retirement starts, and select  
4.   Select  

The value displayed, $90,047.18, is the income you would need the first year of your planned retirement, based on the assumptions above.

Step 2: Suppose, in addition to the $90,047.18 first year income needed as calculated in Step 1, you assumed:

  1. You want to increase your annual withdrawals by 4% a year to offset inflation.
  2. You need income for 30 years of retirement (life expectancy).
  3. The rate of return your investments will earn is 5%.

  If you did not include income taxes in your “spending plan,” then you should use a “net after tax” rate for the assumed rate of return.

To calculate the amount of investment needed to fund a retirement based on the above assumptions, using the Choosing Wealth™ Calculator do the following:

1.   Enter 90,047.18, and select  
2.   Enter 4, the assumed increase in annual withdrawals, and select  
3.   Enter 30, the assumed number of retirement years, and select  
4.   Enter 5, the assumed investment rate of return, and select  
5.   Select  

The value displayed, $2,359,492.81, is the amount of investments (funding) needed, based on the assumptions above, to fund 30 years of spending equivalent to $50,000 in current dollars.

To illustrate how the accuracy of your assumptions can be critical, the following calculation uses the same first year annual income amount and years of retirement, but changes the withdrawal increase from 4% to 5% a year and changes the assumed rate of return on investments from 5% to 4%. With these changes in assumptions, using the Choosing Wealth™ Calculator do the following:

1.   Enter 90,047.18, and select  
2.   Enter 5, the assumed increase in annual withdrawals, and select  
3.   Enter 30, the assumed number of retirement years, and select
4.   Enter 4, the assumed investment rate of return, and select  
5.   Select  

Based on these changes in assumptions, the value displayed, $3,114,164.09, is the amount of investments needed to fund 30 years of spending equivalent to $50,000 in current dollars.

This shows that two minor changes in assumptions can vary the result significantly – in this case more than $750,000.

While there is no way to accurately predict future inflation (cost of living) rates, tax rates, life expectancy or investment returns, without making assumptions and doing the calculations you are left without any real way to make informed wealthy choices, potentially putting the retirement you hope to enjoy in jeopardy.

We might suggest that being conservative in your assumptions should leave you better prepared financially for funding your retirement than being too optimistic and finding out too late that your assumptions have left you out of money with many years left to live.

Download this worksheet here.

TEST YOURSELF

Using the Choosing Wealth™ Calculator calculate the inflation-adjusted income for the first year of retirement and funding needed based on the following assumptions:

  • current income needed $30,000
  • 5 years until retirement
  • 20 years of retirement
  • inflation / withdrawal increases per year 2%
  • investment return 4%

Put your answers here:

First year income needed: _______________________________

Funding needed: _______________________________

First year income needed = $33,122,42, Funding needed = $554,311.24