There are a lot of investment calculators and retirement calculators online, but from what I’ve seen most of them are too-simplistic and overly-optimistic.
Many of them suffer from the same two common shortcomings:
- They don’t take into account inflation, which is devastating to exclude.
- They don’t calculate investment income; just portfolio value.
Early retirement can look easy when you use an investment calculator that uses an optimistic rate of return, doesn’t take into account inflation, and doesn’t include taxes on your investment income.
The investment calculator in this article does take into account those things.
The Impact of Inflation and Tax on Investment Calculations
Suppose you invest $1,000 per month into a portfolio that grows by an average of 7% per year.
After 35 years, you’ll have over $1.6 million in the account. Awesome, right? You’re a millionaire!
Unfortunately, it doesn’t quite work like that. When accounting for 2% inflation per year, that’ll be worth less than $850,000 in today’s dollars.
If you withdraw 4% of it per year, that’ll give you about $34,000 in inflation-adjusted annual retirement income on top of pensions and social security (if they even exist then). Then if you pay a 15% tax rate, you’ll have about $29,000 per year in spending money.
That’s a little bit less glamorous than a seven-figure portfolio would imply.
And it could be worse. If investment returns from stocks and bonds are low and you only earn 5% per year on average, then your inflation-adjusted retirement amount will be just over $550,000, and your post-tax 4% annual withdraw income would be about $19,000/year.
A good investment calculator or retirement calculator needs to take this into account.
My Financial Freedom Investment Calculator
I have a free simple downloadable investment and retirement calculator that includes some of those variables and in my opinion does a more thorough job of figuring out how much to invest to meet your goals. It’s based in Excel and easy to use.
You just download it and fill in six simple variables.
Here’s the free Excel spreadsheet tool to calculate your own journey to financial freedom or retirement:
With that tool, you can adjust the following variables:
- Current portfolio value
- Yearly savings amount
- Expected long-term rate of return
- Expected long-term inflation rate
- Withdraw rate for determining passive investment income
- Effective tax rate on your investment withdraws
That way, you can see how different scenarios play out with a better degree of accuracy, and develop a game plan from there.
Personal Capital Retirement Calculator
Another great free retirement calculator is from Personal Capital. I use it myself to monitor my net worth and spending over time.
With Personal Capital, you can see a complete picture of your financial situation:
- A graph of your net worth over time, to see where you stand.
- A detailed breakdown of where all your expenses go each month.
- A fee-scanner, to find hidden fees you might not be aware you’re paying.
- A retirement planner, that helps you figure out if you’re on track.
The retirement investment calculator is particularly nice, because you can plot various life events, and analyze different optimistic or pessimistic scenarios for market conditions, saving rates, and so forth:
You can access the free tool here.
Whichever investment calculator you use, the earlier you start planning, and the more realistic you are with your assessment, the better off you’ll be when the time comes.