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Retirement nest egg calculator

How long will your retirement nest egg last? How much could your investments grow? Answer a few questions to see a long-term projection. Then try making a few changes to view the impact on your results.

The green and orange shaded regions cover the range of possible outcomes for your retirement portfolio, given your starting balance, your annual spending, and your portfolio allocation. We determine these possible outcomes using a technique called Monte Carlo simulation, which involves simulating a large number of potential market scenarios—up and down markets of various lengths, intensities, and combinations. The green region covers those simulations in which you reached your goal (your portfolio lasted for the duration of your retirement), while the orange region covers those in which your portfolio came up short.

Note that the size of the region does not indicate the likelihood of a particular outcome. For example, it's possible that many simulations are concentrated within a small region, or a few divergent simulations are spread over a large region.

We determine the probability that your portfolio will last for the duration of your retirement by tallying the results of each independent simulation. Results may vary with each use and over time.

To account for the effects of inflation, the calculator uses the annual changes to the Consumer Price Index, from 1926 through last year. The results displayed in the chart are nominal dollars.

When determining which index to use and for what period, we selected the index that we deemed to fairly represent the characteristics of the referenced market, given the available choices. For U.S. stock market returns, we use the Standard & Poor’s 90 from 1926 to March 3, 1957; the Standard & Poor’s 500 Index from March 4, 1957 to 1974; the Wilshire 5000 Index from 1975 to April 22, 2005; the MSCI US Broad Market Index through June 2, 2013; and the CRSP US Total Market Index thereafter. For U.S. 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 the Barclays Capital U.S. Aggregate Bond Index from 1976 to 2009 and the Barclays U.S. Aggregate Float Adjusted Bond Index thereafter. For U.S. cash reserve returns, we use the Ibbotson U.S 30-Day Treasury Bill Index from 1926 to 1977, and the Citigroup 3-Month Treasury Bill Index thereafter.

For each year of each simulation, we randomly select one year of stock, bond, and stable-value returns from the database. Using those values, we calculate what would happen to your portfolio—subtracting your spending, adjusting for inflation, and adding your investment return. We repeat this process, one year at a time, until the end of your retirement or until your portfolio runs out of money. The next simulation starts the whole process from the beginning. After 5,000 independent simulations, we've tested a broad range of possible scenarios, and clear patterns begin to emerge. By keeping track of the number of simulations in which your portfolio lasts for the duration of your retirement, we're able to estimate the probability that your plan will be successful. For example, if your portfolio survives in 4,000 out of 5,000 simulations, we can estimate that the probability of success is 80% (4,000/5,000=0.80).

Of course, it's important to remember that Monte Carlo simulation assumes that the future will be at least somewhat like the past—after all, we're using historical data in each simulation. In actuality the future may contain scenarios that are better or worse than anything considered by this tool. It's also important to remember that, despite the sophistication of this method, this calculator makes a number of simplifying assumptions, so these results should never form the sole basis of your financial plan. In particular, the Monte Carlo methodology used here assumes no relationship between asset-class returns from one year to the next. Randomly selected years are considered in sequence. For example, in a given simulation the returns on stocks, bonds, and short-term reserves for 1982, when the nation was deep in recession, could be followed by the returns for 1999, a bull-market year.

Finally, Monte Carlo simulation is one approach for modeling the range of possible future investment outcomes. Because other methodologies differ in certain assumptions, they may yield different results.

IMPORTANT: The projections or other information generated by the retirement nest egg calculator regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Calculators are made available to you as educational tools for your independent use and are not intended to provide financial planning or investment advice. These tools help you see which factors are most important to consider in making a particular financial decision, and they illustrate the relative impact of each factor on the projected outcome.

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