Chapter 3: Creating Projections

Chapter 2: Tools

Projecting investment returns is the most difficult part of creating a retirement-income plan. However, once you know your projected returns, you can estimate and begin to supplement any shortfalls in your plan.

Gather the following information, which is typically available on monthly or quarterly statements:

  • Current balance of investments
  • Total annual contributions, including any employer-match contributions.
  • Number of years until retirement
  • Expected return on investment

If you’re using a quarterly statement, multiply the sum of contributions, between you and your employer, by four to determine your total annual contributions. You can also check your online account or call your employer-plan provider if you need further assistance with determining your total annual contributions.

Future-Value Calculator

To calculate the estimated-future balance of your investments, use a future-value calculator. If you don’t have one, Calculator Net offers an easy-to-use, free, future-value calculator and requires the following information (Figure 3.1):

  • Number of periods: (the number of years until retirement)
  • Starting amount: (current balance)
  • Current interest rate: When trying to determine your assumptions for investment returns, you can either use your current rate-of-return on your investments or you can use the following assumptions:
High risk7.5%
Moderate-to-high risk6.5%
Moderate risk5.5%
Moderate-to-low risk4.5%
Low risk3.5%
  • Periodic deposit: This is the total of annual contributions, which includes any employer-matching funds.

Once this information is entered, click “Calculate” and the future-value calculator will display your values.

Figure 3.1 Example of a future-value calculator

Next, determine your monthly shortfall. This is the difference between what you project to have and the amount you hope to have at retirement. Use the following formula:

Total monthly budget – (Social Security benefit + pension benefits + amount of other fixed-sources of income) = shortfall

Your investments and/or sale of assets will be used to make up this shortfall.

To calculate how long your investments will last, use the future-value calculator one last time and input the following information:

  1. Number of periods: 20 years is a good number to use at first.
  2. Projected balance at retirement: Use the number from your projection at the beginning of this chapter.
  3. Interest rate: Use an assumed rate-of-return or your actual rate-of-return. You may wish to consider lowering your assumed rate of return for your retirement projections because most retirees tend to have a lower risk-tolerance.
  4. Periodic deposit: This is the total annual-withdrawal amount and should match your monthly shortfall amount. To make the future-value calculator run correctly and make it a periodic withdrawal, you need to input the periodic deposit as a negative number (Figure 3.2).
  5. Calculate: Once you’ve entered all of your data, click “calculate”.

Figure 3.2 Inputting the Periodic Deposit as a negative number in the future-value calculator

  1. Adjustment: Continue to adjust the number of periods until the future value is close to zero (Figure 3.2).
  2. Recalculate: Remember, each time you change the number of periods, you must “re-calculate” to get an accurate number.  It may take several times to find the right number but once you do, you’ll know how many years your money will last during retirement.

Figure 3.3 Adjusting the number of periods and recalculating with a future-value calculator

Chapter 4: Executing Your Plan