Retirement Calculator

Overview

This retirement calculator is an educational tool designed to help you understand where you are on your path to financial security in retirement. Its insights are derived primarily from the information that you provided to us about: (1) the amount you currently have saved for retirement; (2) the percent of your income that you currently contribute to your retirement savings; and (3) the income you would like to have in retirement.

The Retirement Calculator is not intended to be investment advice and is not a substitute for a sound financial plan. It is not a recommendation that you take a particular course of action. We do recommend that you consider speaking with a Northwestern Mutual financial representative, who can provide you with assistance in developing a comprehensive financial plan to help put you on the path to financial security over your lifetime.

Assumptions Made By The Calculator

Current After-Tax Income: We assume that you pay a total of 35% of your salary in state and federal taxes. Accordingly, to estimate your current after-tax salary, we take the amount that you told us that you earn and multiply that amount by (1 - 0.35), or 0.65.

Mortality: We ask you to tell us whether you are male or female because this impacts your life expectancy. If you prefer not to tell us your gender, we assume that you are female. This results in a more conservative evaluation of your retirement readiness because females have a longer life expectancy than males. Mortality events are generalized using data from the American Academy of Actuaries, and the Society of Actuaries.

Retirement Contributions: For purposes of calculating the values, we assume that you will continue to contribute the same percent of your income to retirement savings up until the date of your retirement. We assume that your contributions are made in 12 evenly spaced intervals throughout the year and that you will begin earning a return immediately on such contributions.

Inflation: We assume an inflation rate of 2.25%.

Income Growth: We assume that your income will grow at the rate of inflation through the date of your retirement.

Rate of Return: We assume that your existing retirement savings and your assumed future contributions grow at a constant rate set at 4.19% both before and during your retirement.

Calculations

When you use this tool to assess your progress toward financial security in retirement, it produces numerical results, including (1) a dollar amount that “you may have” to spend on a monthly basis during retirement, (2) a dollar-amount that “you may need” on a monthly basis during retirement to achieve the level of spending that you indicated you would like to meet, and (3) to the extent there is a shortfall between the “you may have” and “you may need” numbers, a dollar-amount that you should consider saving on a monthly basis in addition to what you currently are saving (your “estimated savings change”) to close the gap between the “you may have” and “you may need” retirement numbers. The manner in which we calculate these numbers is described below.

What you may have

We use the retirement calculator to predict a dollar amount for “what you may have” to spend during your retirement based on your current assets, expected retirement savings rate, and the assumed rate of return on your retirement savings.

The formula calculates a lump sum at retirement age that would be available to you to spend during your retirement (given the amount that you currently had saved for retirement, amounts that you expected to save in the future, and assumed rate of return). Using this lump sum and including your expected retirement length and assumed rate of return on your savings during retirement we calculated an amount that you could expect to be able to spend on a monthly basis without running out of assets prior to your mortality date.

What you may need

We calculate “what you may need” in retirement based on information you provided to us regarding your expected level of spending during retirement relative to your current level of spending. We use your current after-tax income (net of retirement contributions) as a proxy for what you are spending currently. If you tell us that you expect to spend more in retirement, we add 15% to this amount; if you expect to spend less in retirement, we reduce this amount by 15%. If you tell us that you expect to spend about the same amount, we keep it the same. In each case, we divide the amount by 12 to convert it to a monthly income need.

Estimated Savings Change

Finally, if your “you may have” amount is less than your “you may need” amount, we provide an estimate of the amount of additional monthly contributions you should consider making to your retirement savings to close that gap by the date of your retirement. We perform a number of calculations to provide you with this estimate.

First, we calculate the consumption rate that equals the fraction of your current expected nest egg that you could expect to spend on an annual basis during retirement without running out of assets before you die.

We then take the amount you have told us that you would like to be able to spend on an annual basis during retirement and divide that amount by the consumption rate. The quotient from this calculation equals the estimated nest egg that you would need to accumulate in order to produce your desired income in retirement (which is based on your assumed income need, mortality date, and asset growth during retirement).

To determine the additional amount you need to save to accumulate this nest egg (i.e., your estimated savings change), we subtract from it the amount of your current expected nest egg, and using the annuity formula, we solve for the amount that you would have to save on a monthly basis to accumulate assets equal to that difference at your retirement date.