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If you were to retire today, or are already retired, could your retirement portfolio last throughout your lifetime? Use this calculator to obtain an estimate of how long your tax-deferred retirement assets could last if you were to start using them now.
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Detailed assumptions used by the Vanguard Lifetime Spending Analyzer™Spending and inflation. We assume you will increase the dollar amount of withdrawals you make over time, in order to match the rate of inflation. In other words, rather than assuming you simply withdraw a constant dollar amount in all years, we assume that you will keep your total purchasing power constant over time by increasing your dollar amount of after-tax spending each year at the rate of consumer price inflation. Required Minimum Distributions (RMDs). We calculate your RMDs using the factors from the RMD tables, as required by IRS tax regulations. We assume that if your spending is ever met or exceeded by the required minimum distributions, any "surplus income" is reinvested in an after-tax portfolio with the same asset allocation as your tax-deferred portfolio. If after we create such an after-tax portfolio, your spending needs are subsequently not met by the required minimum distributions, we assume you will liquidate these after-tax investments before making additional withdrawals from your tax-deferred retirement portfolio. We assume spouses are always less than ten years apart in age for purposes of calculating RMD amounts. Asset Allocation. We assume that you will maintain a constant asset allocation over your entire planning horizon by rebalancing your portfolio at the end of each year. (We do not, however, model the tax consequences of rebalancing the after-tax portfolio that may be created in circumstances where minimum distributions exceed your chosen spending level.) Income Taxes. Based on the information you provided, we estimate the taxes that would be due each year, taking into consideration distributions from your tax-deferred accounts, as well as dividends and capital gains from a taxable portfolio, if applicable. We then add this tax estimate to your projected expenses each year to determine your total spending. Thus your "spending amount" is an after-tax amount. We use data on the historical amount of capital gains and dividend returns of each asset class, and we assume 30% of total capital gains distributions are taxable each year. Capital Gains. We calculate your capital gains rate based on the marginal tax bracket you indicated. Your capital gains rate is assumed to be 5% if you indicate your marginal tax rate is 20% or less; otherwise we assume 15%. Historical Return Period. We use the period from 1926 through 2006 as the basis for both our historical rate of return and inflation assumptions because it encompasses a variety of different economic and investment environments: a period of sharply rising inflation and interest rates (1973 through 1980); a period of relatively low inflation and falling interest rates (1982 through 1993); and a period of stable inflation (1960s). Returns of the indexes do not reflect expenses or fees. More information about the Vanguard Lifetime Spending Analyzer™A cash flow analysis that uses a constant annual rate of return can differ significantly from an analysis that uses returns that vary from year to year, even if the average annual returns for both analyses are exactly the same. The interplay among the specific paths of investment returns, inflation, and your withdrawal pattern can have a decided effect on your assets and the sustainability of income. Therefore, it is important to examine your portfolio under a variety of different return and inflation conditions. This calculator uses a straightforward method in order to do so. In this calculator, we create 80 different simulated "time paths" for the evolution of your portfolio by first assuming that you begin taking withdrawals at a specific point in history (e.g., 1960, 1970 or 1980). We then use the actual, historical rate of return that occurred in each subsequent year from that point going forward, applying them in sequence to your portfolio as time rolls forward. If such a path needs to go beyond the year 2006, we just loop back to the returns of 1926, and cycle forward from there until either your assets are depleted, or the end of your planning horizon is reached. Given past historical data we use (returns from 1926 through 2006), we end up with 80 different starting years, with 80 different time paths. Your "estimated success rate" is simply the fraction of these paths in which your balance at the indicated point in time (also age) is above zero. In other words, it's the fraction of paths in which your assets could support your chosen level of spending up until the time (age) listed. Note: For stock market returns, we use the Standard & Poor’s 500 Index from 1926 to 1970, the Dow Jones Wilshire 5000 Index from 1971 through April 22, 2005 and the MSCI US Broad Market Index thereafter. For bond market returns, we use the Standard & Poor’s High Grade Corporate Index from 1926 to 1968, the Citigroup High Grade Index from 1969 to 1972, the Lehman Brothers U.S. Long Credit AA Index 1973 to 1975 and the Barclays Capital U.S. Aggregate Bond Index thereafter. For the returns on cash investments, we use the Citigroup 3-Month Treasury Bill Index. |
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This Page Last Modified:
Thursday, April 15, 2010 |
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