Retirement Income Calculator Step By Step Easy Guide

Retirement Income Calculator

Retirement Income calculator can be used to calculate the amount that shall be available at the time of retirement while making savings and accumulating the same periodically.

About Retirement Income Calculator

The formula for calculating Retirement Income is as below:

Retirement Income Calculator

B x (1+r)Fxn + I x [((1+r)Fxn – 1)x (1+r) / r ]

B is the amount already deposited
I is the periodical fixed amount invested at regular intervals
r is the rate of interest
F is the frequency of interest being paid
n is the the number of periods for which savings shall be made.

Periodical Retirement Income is made then calculation:

In case the investment is made at the beginning of the period:

Wherein,

B is the amount already depositedI is the periodical fixed amount invested at regular intervalsr is the rate of interestF is the frequency of interest is paidn is the number of periods for which savings shall be made.

Retirement Income Calculator can be used to calculate what amount shall be available to the individual when he saves an amount periodically and invests at a certain rate of return. One needs to plan what amount he requires, what number of years he is expecting to live after retirement, and the income that he expects. This calculator shall be used to calculate the return earned on the investment made and how much amount shall be available on a monthly basis post-retirement.

There are many products wherein the individual can be invested and make a retirement plan. This depends upon the inflation rate, the number of years to retirement, current tax rate, retirement tax rate, return earned before retirement, and return earned after retirement. All these factors need to be considered before deciding to invest and fix it at a certain rate.

How to Calculate Using the Retirement Income Calculator?

One needs to follow the below steps in order to calculate the amount for Retirement.

Step #1 – Determine the initial balance or any amount that is set aside for retirement, as even that amount will be used to calculate the maturity amount.

Step #2 – Figure out the rate of interest that would be earned on the Pre-retirement age.

Step #3 – Now, determine the duration left from the current age until the age of retirement.

Step #4 – Divide the rate of interest by the number of periods the income that shall be paid. For example, if the rate paid is 4% and it compounds annually, then the rate of interest would be 4%/1, which is 4.00%.

Step #5 – Now use the formula that was discussed above for calculating the maturity amount of the Retirement Income, which is made at regular intervals.

Step #6 – The resultant figure will be the maturity amount that would include the income plus the amount contributed.

Step #7 – There could be tax liability at the time of retirement, which should be accounted for accordingly.

Step #8 – Now, after accounting for taxAccounting For TaxTax accounting is the framework that considers the tax returns instead of public financial statements disclosure while recording and presenting the business transactions in the books of accounts. It complies with the rules and policies of the company’s Internal Revenue Code.read more, one can divide the amount by a number of periods the individual is expecting to live during retirement.

Example #1

Mr. A is currently aging 32 years and has been accumulating funds for his retirement. Currently, he has $10,500 in his retirement fund account. He has started depositing $800 per year for his retirement, and he would be paying a 15% tax on his investments. He would be earning 6.88% on his investment, and he plans to retire by the age of 65 years, and he considers living for 20 more years after his retirement.

Based on the given information, you are required to calculate the amount that Mr. A can withdraw on a monthly basis post his retirement.

Solution:

We are given the below details:

B = $10,500I = Fixed amount deposited periodically, which is $8,00T = Tax rate is 15%r = Rate of interest, which is 6.88% pre-tax and is compounded annually and post-tax, it would be 6.88% x (1 – 0.15), which is 5.85%F = Frequency which is annually here, hence it will be 1n = number of years the Retirement Income proposed to be made will be different of retirement age less current age (65 – 32), which is 33 years.

Now, we can use the below formula to calculate the maturity amount.

= $10,500 x ( 1 + 5.85% )1 x 33 + $800 x [(1+5.85%)1×33 – 1 x (1+5.85%) / 5.85%]= $148,494.06= $10,500 x ( 1 + 5.85% )1 x 33 + $800 x [(1+5.85%)1×33 – 1 x (1+5.85%) / 5.85%]= $148,494.06

He estimates to survive for 20 years more during his retirement, and therefore, he would be receiving it for 20 x 12, which is 240 months, and per month retirement income would be $148,494.06 / 240, which is $618.73.

Mr. A can withdraw on a monthly basis after his retirement is $618.73

Example #2

Mr. Zee, who has 23 years left in his retirement, has started to plan for his retirement at the age of 66 years, and he estimates that he would outlive 25 years after he retires. His pre-retirement tax rate is 18% and post-retirement tax is 10%. His investments, however, won’t be earning any return after he retires. He wishes to invest $500 every year in the retirement account and wishes to increase the amount by a rate of inflationRate Of InflationThe rate of inflation formula helps understand how much the price of goods and services in an economy has increased in a year. It is calculated by dividing the difference between two Consumer Price Indexes(CPI) by previous CPI and multiplying it by 100.read more every year. He wishes to withdraw monthly after his retirement and invests during the beginning of the year. His investment would earn 6.43%, and inflation on average per his expectations is 1%.

B = $0I = Fixed amount deposited periodically, which is $500T = Tax rate is 18%I = Inflation Rate is 1%r = Rate of interest, which is 6.43% pre-tax and is the nominal interest rateNominal Interest RateNominal Interest rate refers to the interest rate without the adjustment of inflation. It is a short term interest rate which is used by the central banks to issue loans.read more and is compounded annually and post-tax and post inflation rate it would be (6.43% -1.00%) x (1 – 0.18), which is 5.27%F = Frequency which is annually here, hence it will be 1n = number of years the Retirement Income proposed to be made will be different of retirement age less current age (66 – 43), which is 23 years.
= 0 x ( 1 + 4.45% )1 x 23 + 500 x [(1+4.45%)1×23 – 1 x (1+4.45%) / 4.45%]= $20,216.75

Now at the time of retirement, the tax rate would be 10% and hence post-tax, it would be 20,216.75 x (1 – 0.10) which is $18,195.07

He estimates to survive for 25 years more during his retirement and therefore, he would be receiving it for 25 x 12, which is 300 months and per month retirement income would be $18,195.07 / 300 which is $60.65.

Mr. A can withdraw on a monthly basis post after his retirement is $60.65

Conclusion

As discussed above, the retirement income calculator can be used to calculate the periodical amount that is available to the individual periodically. One needs to understand their expenses and what kind of life they want to leave post-retirement and accordingly plan for it.