Retirement Number Calculator

golden egg

This calculator computes the financial position you need to be in for retirement. And it explains how your number was derived.

This calculator does not include a questionnaire on risk tolerance (your psychological ability to stomach investment losses). Instead it primarily concerned with computing the appropriate strategy given your risk aversion (preference for uniform consumption).

Several things set this calculator apart:


Sex: Age:
Spouse/partner: Age:

Total life expectancy for self (if known) [?]: Spouse:
Enter your total life expectancy if known, or leave blank to have your life expectancy computed using U.S. Social Security Administration data.

Financial position

This section highlights the balance sheet nature of the approach used. Any asset can essentially be thought of as a series of future cash flows that may be certain or uncertain to some degree. This is true not only of the future cash flows from stocks and bonds, but also such items as future Social Security or pension payments as well as future contributions to retirement savings.

Existing defined benefits:

Starting age Annual amount Inflation indexed Period certain Death benefit
Contingent/survivor payout
Social Security %
Social Security %
Starting age is that of the owner. Annual amount is in current inflation-adjusted after tax dollars, not future dollars. For income annuities, which become fully taxable after a certain age, enter the expected average after tax amount. Payouts last at least as long as the owner's life. Period certain: the number of years for which payments are guaranteed, even if the owner dies. Contingent: payout reduced on death of either party. Survivor: payout reduced only on death of the owner.

Financial goals

Age of primary person at retirement:
Relative income required when one party deceased: %
Annual desired retirement consumption level:
Retirement consumption should be expressed in current inflation-indexed dollars.

Use liability matching bonds [?]:
Inflation-indexed liability matching bonds are a valuable retirement planning tool. However the short term volatility of long duration liability matching bonds may make them unattractive to investors with a low risk tolerance. If liability matching bonds are not used we naively replace them with regular bonds.

Permit recommendation of income annuities [?]:
Income annuities only make sense if you are in reasonable health.

We do not support the ability to leave a specific bequest amount.

Market parameters

You can probably leave the parameters in this section alone.

Estimated equity arithmetic real return: % Volatility: %
U.S. market average values for 1927-2014 are 8.7% and 19.6%. World market average values for 1900-2000 are 7.2% and 17.0%. Going forward many experts predict lower U.S. stock market returns.

Estimated regular bonds arithmetic real return: % Volatility: %
Estimated U.S. market average values for 1927-2014 are 3.2% and 8.7%. However we are presently in a low rate environment. On 2016-08-09, 10 year constant maturity Treasuries were projected to earn 1.6%, which is 0.6% below the Survey of Professional forecasters 10 year inflation rate of 2.2%. We estimate the premium of an average bond portfolio over 10 year constant maturity Treasuries is 0.6%, making a total return of 0.0%.

Using the default parameters no regular bonds will typically be recommended because they currently have a lower expected return than zero long-term volatility inflation indexed liability matching bonds.

Correlation of equity returns with bonds: %
Estimated U.S. market average value for 1927-2014 is 7.3%.

Real volatility of 10 year inflation-indexed zero coupon bonds: %
Correlation with regular bonds: %
Synthetic historical values for 1972-2014 for coupon bonds are 4.9% and 28.9%. Zero coupon bonds will be similar.

Standard error of estimate of equity real return [?]: %
U.S. market average value for 1927-2014 is 2.1%. World market average value for 1900-2000 is 1.7%.
Also report results forming a % confidence interval for the equity return.

Equity and regular bond management fee: %
A value around 0.1% is typical for a low cost provider such as Vanguard.

Calculation date:
Determines interest rate yield curve.

Well being

Coefficient of relative risk aversion, γ:
This determines how risk averse you are. A value such as 1 represents a low degree of risk aversion and favors stocks. A value such as 5 represents a high degree of risk aversion and favors bonds. Risk aversion is not the same as risk tolerance. Risk tolerance is about how psychologically comfortable you are with losses to your investment assets. Risk aversion is about how you feel about a change in your annual consumption. Economists are divided on an appropriate value for γ. Many think it is in the range 1 to 3. Others consider a value of 10 or even higher reasonable. Marginal utility of consumption, U'(C) = C.

This is a difficult concept. We present multiple tables to help you get this important parameter right.

As γ increases the desirability of risk taking decreases.
γ 1 2 3 4 5
Indifference to a 50/50 chance of consuming either 100% of C or 200%
of C versus consuming the guaranteed fixed percentage of C shown
141% 133% 126% 121% 117%

The value of an additional dollar declines as you consume more.
γ 1 2 3 4 5
Value of an additional dollar when consuming 110% of C compared
to the value of an additional dollar when consuming 100% of C
91% 83% 75% 68% 62%

The value of an additional dollar declines rapidly for high consumption levels.
γ 1 2 3 4 5
Value of an additional dollar when consuming 200% of C compared
to the value of an additional dollar when consuming 100% of C
50% 25% 13% 6% 3%

Risk tolerance: 10% annual chance of experiencing real investment portfolio losses of % or more.
Risk tolerance is concerned with the ability to psychologically handle losses to your investment portfolio, and not pull out of the market in the event of a downturn. Risk tolerance differs from risk aversion by only looking at investment assets rather than the total portfolio including defined benefits. Setting it to a low or intermediate value provides for peace of mind but will reduce your expected consumption. In an ideal world it might be set as high as possible so that risk aversion, which looks at the total portfolio, can take over in determining the appropriate asset allocation. For the default market parameters a value of 18% or higher effectively imposes no constraints. Setting it to a value of 10% or less is only possible for ages above about 40, or if you also alter the default market parameters to be indicative of shorter-term bonds.