Wednesday, August 25, 2010

Infinite Retirement Calculator

As you may know, I plan on living forever. Dying just seems so wasteful, so I think I'll skip that part of life. Living forever requires some planning, though. It'd be rather annoying to retire and then be forced back into the workforce at age 2718 because I ran out of money. Every retirement calculator I've ever found requires you to choose how long you will be retired. The longest option I've seen is 120 years, but even that's rather pessimistic. So then, I need to know how much money I need to save up in order to retire - forever. Alternatively, I'd like to know how much I can take out every year given my current investments.

I tried to be as conservative as possible in my planning. I assumed I would take out the entire year's spending money at the beginning of the year, i.e., I was pessimistic about how much of my net worth would grow each year. Of course, this pesky little recession has shown that I'm being ridiculously optimistic by assuming any sort of consistent growth during my retirement. Still, this is for planning purposes only, and certain assumptions have to be made in order to make the math at all reasonable.

So, without further ado, the calculator!

  • Modify either the "Net worth" or the "Max sustainable income" field and the other will be calculated.
  • "Growth rate" and "Inflation rate" are configurable as well.
  • The bold label indicates the calculated value.
Net worth ($):
Growth rate (%):
Inflation rate (%):
Max sustainable income ($):
Monthly values?

For every $0.00 you save, your eternal retirement income increases by $1.00.

Some following ado is in order. It should be noted that the "Net worth" and "Max sustainable income" values are in current dollars. The amount you withdraw is assumed to adjust for inflation each year; your infinite retirement should maintain a consistent quality of life. Since money equals happiness, this means your purchasing power should remain the same no matter how long you live. Similarly, the "Net worth" (when calculated) is how much you would need today in order to retire. The amount you need goes up each year, since your income requirements get larger as you postpone your retirement, but most of the difference should be accounted for in the principal growth that would be occurring. It should also be noted that the amount you have to save per dollar is entirely dependent on the growth and inflation rates, so these are rather important to estimate right (and/or conservatively).

Observant readers may have noticed that the default inflation rate of 3.3% closely matches the annualized inflation rate discussed previously. They may have also noticed that the default growth rate of 7% does NOT match any of the numbers in my discussion on the annualized growth rate. I chose 7% because this calculator models retirement, and people tend to be more conservative in their retirement. I think 7% is a better reflection of a portfolio with a significant percentage allocated to bonds, for example.

The "Net worth" label is probably a bit misleading, but it gives you a good place to start. I would probably not include my home equity in these calculations because I don't plan on using that for income in any way. Similarly, cash accounts won't come close to the average growth most people assume in their models, and would probably best be ignored. I would have used "Retirement savings" except that term is usually used to refer to 401(k) and IRA accounts, and regular taxable accounts can grow and produce income, too.

Growth and inflation rates are APY values. The default values reflect yearly budgeting, and for yearly values, APR=APY and things are simple. When the "Monthly values?" checkbox is checked, the growth and inflation rates are adjusted such that the APY remains the same as for the yearly case, other than rounding errors. When looking at monthly values, your overall income will still be higher (or your net worth needed lower) because you are leaving your money growing a few months longer.

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