Important calculation notes and considerations This calculation uses an average life expectancy for men and women based off of the Social Security Administration’s Actuarial Life Table. (Source: https://www.ssa.gov/oact/STATS/table4c6.html)
Calculation assumes a pre-retirement rate of return of 7%. This figure is based on longer time horizon average stock market returns but is not an actual rate of return. The actual rate of return will vary and is dependent on the types of investments you make and the performance of those investments. The total 10 year annualized return of the S&P 500 was 7.61%, and net 10 year annualized return was 6.91% as of August 31, 2017 (Source: http://us.spindices.com/indices/equity/sp-500)
Calculation assumes a retirement rate of return of 4%. This differs from the pre-retirement rate of return primarily because of the shorter investment time-horizons retirees typically have and the more conservative investments used for investors with shorter time horizons. This is not an actual rate of return. The rate of return you earn will depend on the types of investments you make and the performance of those investments. The total 10 year annualized return of the S&P 500 Bond Index was 5.76% and the total 5 year annualized return was 3.65% as of August 31, 2017 (Source: https://us.spindices.com/indices/fixed-income/sp-500-bond-index)
Calculation assumes a 2% annual income growth rate. According to the Bureau of Labor Statistics: Occupational Employment Statistics, National annual mean wage across all occupations averaged 2.33% for the last ten years ending May 2016. (Source: https://www.bls.gov/oes/tables.htm)
This calculator uses a replacement rate of pre-retirement income of 80% based on your salary at the point immediately preceding retirement. Replacement rates are a generally helpful rule of thumb for calculating income needed during retirement, but should not be considered the actual amount you’ll need. This rate is based on several assumptions that may or may not pertain to your individual circumstances including the assumption that expenses are likely to be reduced during retirement years, the need to save for retirement will be eliminated and others. This replacement rate also does not consider personal preference factors like the proclivity for some to expend more during their retirement years than their pre-retirement years. The Social Security Administration notes that among Financial Advisors, a typically used replacement rate used is 70%, while this calculation makes a more conservative estimation of 80% of pre-retirement income. (Source: https://www.ssa.gov/policy/docs/ssb/v68n2/v68n2p1.html)