How the Savings Calculator Works

The Human Interest Retirement Savings Calculator allows you to project your estimated future retirement account balance and monthly cash available in retirement. The outputs are based on your selected inputs above. Your inputs are run through a series of calculations to output the estimated value of your retirement savings at the retirement age you input. The calculator then uses an annuity model to show what your monthly income stream may be if you use the estimated retirement plan account balance to purchase an annuity product after taking distributions from your retirement accounts. This calculator assumes a 7% annual return and a 3% inflation rate based on Employee Benefits Security Administration's (EBSA) suggestion for Lifetime Income Illustrations. There are IRS limits on the amounts an individual can contribute to a qualified plan or IRA each year. There are also total annual contributions limits to an individual’s qualified retirement plan. This calculator uses the contribution information you enter and does not impose a limit on the amounts you may enter. To get the most accurate information, do not enter amounts that exceed the applicable annual limits. For 2023, the 401(k) contribution limit is $22,500.00 annually. Individuals aged 50 or over may contribute an additional $7,500.00 annually through catch-up contributions. These scenarios are hypothetical and future rates of return can't be predicted with certainty. Investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. The rate of return noted above does not reflect sales charges and other fees that investment companies may charge. This calculator is provided for illustrative purposes only and actual results will vary. 

Key Terms and Definitions

Annuity — A long-term contract between an investor and a financial institution (e.g., an insurance company) that can be used to fund retirement. These contracts require either lump-sum or periodic payments in exchange for a guaranteed income stream. The guarantee is subject to the claims-paying ability of the entity. Retirement plans on the Human Interest platform do not offer annuities. The calculator uses an annuity model to show what income stream an individual may have if they use their estimated retirement plan account balance to purchase an annuity product after taking distributions from the retirement accounts. For informational use only.

Single Life Annuity — A type of annuity structured to provide guaranteed payments to a single individual for the duration of their life. Single-life payouts are designed to stop when an individual dies. The guarantee is subject to the claims-paying ability of the entity. Retirement plans on the Human Interest platform do not offer annuities. The calculator uses an annuity model to show what income stream an individual may have if they use their estimated retirement plan account balance to purchase an annuity product after taking distributions from the retirement accounts. For informational use only.

What is the current balance of your retirement accounts? — The total amount of funds you currently have set aside for retirement in a 401(k), 403(b), or IRA. You can include retirement accounts you hold anywhere, not just on the Human Interest platform. The calculator defaults to $65,000.00 which is the conditional median value of retirement accounts in 2019. Most recent available.

What is your current age? At what age do you plan to retire? — Your current age and expected age of retirement are used to approximate the potential growth of your retirement funds and to calculate an estimated annuity based on the IRS actuarial tables published annually by the Social Security Administration.

How much do you contribute annually to your retirement accounts? — This amount will be used by the calculator as the contribution amount for the first year the calculator analyzes data.

By how much do you expect to increase your contributions annually? — This is the percentage (from 0% to 7%) that you plan to increase your contributions annually. This may be because you choose to increase your contributions annually or because you participate in a retirement plan that automatically increases your contribution annually. The calculator will apply the percentage you choose to the annual contribution amount from the year before to determine the contribution amount for the year. This will cause the contribution amount to increase each year, based on the original contribution amount you enter.

Projected Value at Retirement (adjusted for inflation) — The cumulative value in today’s dollars of your retirement accounts adjusted for inflation. The calculator assumes a 3% inflation rate.

Monthly Cash Available During Retirement — The amount of money you can expect on a monthly basis using an annuity-based calculation assuming a user will live to a maximum age of 120 years.

Assumptions

7% annual return — The calculator assumes that your retirement balance will bring a 7% annual return based on the EBSA’s suggested annual return rate used for Lifetime Income Illustrations. The calculator is only used to estimate your future retirement balance. You cannot adjust this percentage. Any fees you pay to service providers or on investment vehicles are not taken into account by the calculator.

3% inflation rate — We are assuming a 3% inflation rate based on the EBSA’s suggested inflation rate used for Lifetime Income Illustrations. The calculator is only used to estimate your future retirement balance. You cannot adjust this percentage.

Projected Value at Retirement Adjusted for Inflation

The future balance projection has two phases:

1. Calculating the future balance for each month until retirement. 

2. Converting the final value into present-day dollars (adjusting for inflation).

Calculating the future balance for each month until retirement

The time remaining between now and retirement is broken into a sequence of months based on the difference between the current age and expected retirement age inputs.

Each month the balance is updated:

1. The value of the account is multiplied by 1.005654, the monthly market growth effect.

   1. This is the number that will lead to a growth of 7% over the course of a year.

2. Money equal to [annual contribution] / 12 is added to the total (after step 1, above).

After every 12 months, the value of the annual contribution is changed based on the user-entered value for change in contribution.

The final value in future dollars equals the balance after all the months have been processed.

Converting the final value into present-day dollars

In this step we take the final balance after the last month and adjust for inflation, assuming an inflation rate of 3%. 

Example

Let’s say that a user has a current balance of $20,000.00. They enter “Age = 40” and “Retirement Age = 70.” The procedure will go through a sequence of 30 * 12 = 360 months.

If their annual contribution is $10,000.00 and the user enters 4% for annual increase in contribution, then after 12 months, the annual contribution would be changed to $10,000.00 * 1.04 = $10,400.00.  

After 12 more months, the annual contribution would change to $10,400.00 * 1.04 = $10,816.00.

After 12 more months, the annual contribution would change to $10,816.00 * 1.04 = $11,248.64.

The calculator combines the monthly contributions and market growth to generate a future value in future dollars. In the example provided the "future value in future dollars" is $1,654,682.72.

Then, to adjust for inflation, the calculator divides by 1.03 once for every year between now and retirement to generate the Projected Value at Retirement (adjusted for inflation). In this example, the calculation is $1,654,682.72 / ((1 + 0.03)^30) = $681,707.37. The calculator rounds to the nearest dollar to display the Projected Value at Retirement (adjusted for inflation) as $681,707.00.

Converting to Monthly Cash Available During Retirement

To compute a monthly stream of income, we estimate what Single Life Annuity could be bought for the final value (after adjusting for inflation). 

This calculation:

1. Assumes an interest rate equal to the current 10-year constant-rate yield for US treasury bonds (source: St. Louis Federal Reserve (FRED) as of 03/31/22). 

2. Assumptions do not include the effect of fees and loads on an annuity product.

This step takes each possible age a person can live to beyond retirement and calculates the interest-deprecated value of future monthly payments given until that age, then multiplies it by the likelihood of living to that age. 

Example

Imagine a person will retire at age 67 and the interest rate is 2%. For each age X (in months) a person might live to past retirement, we do two things:

1. Calculate the likelihood that someone who has already reached 67 will live until age X (in months).

2. Calculate the value of a $1.00 / month payment stream for that person if they live to age X (in months) and die before reaching age X + 1.

To show an example, let’s select a value of X = 160. If we assume the user retired right when they reached the age of 67, this would mean they lived 4 months after their 80th birthday.

According to the IRS actuarial tables, the likelihood that someone who has already lived to 67 will live to 80 and die before reaching age 81 is 2.994%.

We split that 2.994% across each of the 12 months to get a 0.2495% of death in any particular month.

Next, we have to calculate the value of 160 payments of $1.00. The value is not $160.00 because future money is worth less than current money due to the availability of a risk-free return from US Treasury Bonds.

To calculate the future-discounted value of 160 payments occurring at the end of the month, we use the formula:

V=(1 - (1 + i)^(-n))/i

V = the value of the payments.

i = the monthly interest rate.

n = the number of payments with a tiny adjustment to account for other factors (birthday could be anywhere in the month, retirement might not happen right at the start of the 67th year, people are slightly less likely to die in later months within the year than earlier months, etc.). This tiny adjustment changes n from 160 to 161.26.

If the annual interest rate is 2%, the monthly interest rate is (1 + 0.02)^(1/12) - 1 = 0.0016516.

The value is then calculated as (1 - (1 + i)^-161.26) / i = (1 - 0.76635) / 0.0016516 = $141.47.

Thus, the value of this scenario where the person lives to 160 months getting $1.00 per month is $141.47, assuming an annual interest rate of 2%. 

To find the total value of a single-value annuity across all the possible ages someone might live to, we take the value for each possible month and multiply it by the probability of that scenario. In this case that would be ($141.47) * (0.002495) = $0.35. The “0.002495” value in the equation represents the likelihood that someone who has already lived to the age of 67 will die in the 4th month after their 80th birthday.

Calculating all these values across all possible months (up to age 120) provides a total value for a $1.00 / month payout of $190.3177. This $190.3177 is the total lump-sum value of a Single-Life Annuity bought at the age of 67 given an annual interest rate of 2%.

Thus, to find the monthly cash stream given an account value at retirement of X, we divide X by $190.3177.

For example, if the estimated future value (in today’s dollars) is $600,000.00, then the monthly cash stream is $600,000.00/$190.31 = $3,152.00.