The purpose of this calculator is:
For more explanation, including some of the assumptions built into the calculator, see below.
When planning for retirement, we have to make some reasonable assumptions based on historical data and expectations. Keep in mind that past performance does not guarantee future results, but it can give us a reasonable starting point.
Here are the assumptions built into this calculator:
All of the monthly savings and starting capital entered have a composite rate of return equal to the rate of return you enter. This should include any fees and taxes to which the funds may be subject.
The monthly expenses you enter are indicative of the lifestyle you want to have during retirement. This should include all money that you expect to spend – housing, groceries, gifts, donations, travel, transportation, insurance, taxes, healthcare etc. Every single dollar spent. The calculator will automatically factor inflation, increasing the expense value entered to reflect the effects of inflation (at the rate you specify) over time.
Many online Financial Independence calculators do not make a serious consideration of the effects of inflation on your monthly expenses. This calculator increases your current monthly expenses yearly by the inflation rate you specify.
The withdrawal rate is the percentage of your overall investment portfolio that you withdraw to cover expenses each year during your retirement.
Just taking a mathematical view of withdrawal rates, it’s clear that in order for your investments to last perpetually, your withdrawal rate (W) must be less than or equal to the rate of return (r) minus the rate of inflation (i). W > r-i. In other words, you cannot take out more money than your portfolio is earning if you want the overall value to remain the same.
The 4% rule is derived from the “Trinity Study” which simulated the success rate of retiring with various portfolios while withdrawing a fixed percentage of your portfolio value each year throughout your retirement (up to 30 years in the study). This study found that for the time period reviewed (1926-1995), you could retire at any time and withdraw 4% of your total portfolio value every year for 30 years without running out of funds.
Since the original study only included data up to 1995, the Poor Swiss expands the study through 2019. Check out their excellent work here.
For a review of the many assumptions of the 4% rule, check out this article from Charles Schwab.
