Related to this calculator, check out our Retirement Withdrawal Calculator and Portfolio Allocation Calculator.
This calculator generates simulation runs for each year of data in our historical dataset (1928 - present) based on what you enter above. It is useful for seeing how much your nest egg may be worth in the future based on the portfolio allocation selected, contributions, and how much you have currently saved.
- Years to Save - how long do you expect to continue working and saving money before you need to begin drawing on your nest egg?
- Starting Balance - how much money you have saved currently.
- Contribution Frequency - yearly or monthly
- Contribution Amount - how much you contribute (yearly or monthly)
- Yearly Contribution Percent Increase - optional field for increasing your contributions to account for raises, inflation, or increased savings over the years. To increase it every year by 2.5%, enter '2.5'.
- Contribution Term - how many years you plan to make contributions. This field must be less than 'Years to Save'. If you leave it blank the calculator will apply the contribution in all years of the simulation. If you enter a value, the calculator will stop making contributions after that year in the simulation and the balance will ride for the remaining years.
- Goal - how much you would like to have saved by the end. The calculator will display the percentage of simulations that exceeded the goal.
- Portfolio Strategy - you can pick from the predefined allocations of Stocks, Bonds, and Cash, or enter your own.
- Stocks - percent of funds to put into the US S&P 500 Index.
- Bonds - percent of funds to put into 10 Year US Treasury Bonds, with returns including coupon and price appreciation.
- Cash - percent of funds to put into a 'risk free' investment. The simulator uses the returns of 90 Day US Treasury Bills. A similar rate is attainable with an FDIC insured money market account.
Some insights into the results this tool unearths:
- The longer you save and the more you contribute, the bigger the balance will be in the end.
- Saving a lot early and letting it grow puts compounding in your favor.
- The "All Cash" portfolio may look safe but it carries a type of risk called "short fall risk". That is where you don't end up with enough to retire on. Inflation constantly erodes the value of cash and the 'risk free' return it generates just doesn't keep up with rising prices.
- The average is usually higher than the median (mid-point) because the distribution of returns skews to the left. Another way to say this is: high returns are relatively large but infrequent, while lower returns are more common. The bar chart showing the distribution of ending balances is weighted to the left in most setups.
- Looking at the simulation high and low numbers (which can be mind bogglingly wide), luck plays a role in the individual's outcome. The years in which you save the most money could make a huge difference, but you won't know until it is too late.
- Diversification reduces risk but also reduces upside. Portfolios that blend stocks and bonds do a good job of bringing up the low end of the simulation, based on the historical data. This is to a point though... too little stocks in the portfolio and the numbers drop like a rock.
- Each simulation plods along every year in the way it is programmed to. It always rebalances every year and withdraws the right amount. In reality, life happens, emergencies happen, and investors panic and sell in bad times. This calculator is what they call a 'disciplined investor' in that it doesn't panic during the bad times, nor does it go crazy and buy a diamond studded phone case in the good times.
How the simulations work:
This calculator is NOT a Monte-Carlo simulator in that it does not generate any fake or random data. Instead, this calculator uses historical data and backtests against it. Essentially it replays what happened in each of the years in the dataset given the inputs and then summarizes the results.
For a 20 year savings period, this calculator will run a simulation from 1928 to 1948, then it will run a simulation from 1929 to 1949, then from 1930 to 1950, and so on. In simulations that go beyond the present year, it will wrap back to 1928 and count up from there. In this sense, the effect of the great depression is factored in for early and late starting years.
Each individual simulation computes returns by stepping through the years (eg 1928, 1929, ... 1948) and performs the following each year:
- Calculates the change in value in the portfolio.
- Increases the contribution amount by the specified percentage if that option was entered.
- Updates the portfolio balance by adding the change in value and adding the contribution.
- Rebalances the portfolio.
Notes on Inflation:
The numbers this calculator outputs are not inflation adjusted, they are nominal values. The numbers don't translate to actual purchasing power in the starting year of the simulation.
Historical Data Used:
The data this calculator uses can be found here.
Past Performance Does Not Indicate Future Results:
Again, this calculator does backtesting. Past performance does not guarantee nor indicate future results. These results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown.