Saving for Retirement and Withdrawal Calculator

The tool features a variety of flexible calculations of accumulated savings you can achieve, the viable monthly withdrawal from these savings, and the remaining savings balance based on your input of investment horizons and investment yields:

1. Phase 1 (Saving for Retirement):
   • Current Savings: Enter the amount you have saved so far.
   • Future Monthly Savings: Enter how much you plan to save each month.
   • Years of Savings: Specify how many years you will continue saving.
   • Annual Investment Yield: Set your expected annual return rate on your investments. It is recommended to input a rate lower than the suggested max annual investment yield shown below this input. The suggested max annual investment yield is based on the length of the accumulation period and for the most aggressive investors. For conservative investors, your yield input should be much lower than this.

2. Phase 2 (Withdrawal Planning):
   • Beginning Savings: This is your total savings at the end of Phase 1.
   • Years of Withdrawal: Define how many years you expect to make withdrawals.
   • Annual Investment Yield: Input the expected return during withdrawal. It is recommended to input a rate lower than the suggested max annual investment yield shown below this input. The suggested yearly max investment yield, based on the length of the withdrawal period, is for the most aggressive investors. For conservative investors, your yield input should be much lower than this. In general, the investment yield assumed in the withdrawal period should also be lower than the yield in the accumulation period. See the reasons here

3. Output:

   The tool can calculate various outputs you want based on your saving and withdrawal situation. It shows your expected ending savings and helps estimate monthly withdrawals until the funds are depleted or reach the target number you set.

   • Suppose you click "Make ending zero" in Phase 2. In that case, the viable "Future monthly withdrawal" amount is calculated to make the ending balance of Phase 2 zero, meaning you have no savings left after the years of withdrawal you specify. If you reduce or increase the withdrawal years, "Future monthly withdrawal" will be re-calculated.
   • Suppose you unclick "Make ending zero" in Phase 2. In that case, you can either set a target "Future monthly withdrawal" and see how much ending savings you can leave for your children as an inheritance, for example, or set a target "Ending savings" and see how much you can withdraw or need to save monthly.

The investment yield assumed in the withdrawal period is typically lower than the yield in the accumulation period for several key reasons:

1. Decreased Risk and Market Volatility: During the accumulation period, the investor is generally more willing to take on risk, as they have time to recover from potential market downturns. They can invest in higher-risk assets with potentially higher returns, like stocks. In contrast, during the withdrawal period, the investor is typically focused on preserving capital and generating more stable income. As a result, their portfolio may shift toward lower-risk, lower-return investments like bonds or dividend-paying stocks, leading to lower yields.

2. Time Horizon: The accumulation period typically has a longer time horizon, which allows for the compounding effect of returns. Investors can use time and market growth to generate higher yields. However, in the withdrawal period, the time horizon can be shorter, and lower, more stable expected yields should be assumed.

3. Capital Preservation: During the accumulation phase, growth is prioritized, and the investor may be less concerned about the preservation of principal. In contrast, in the withdrawal period, the investor relies less on investment returns to grow their portfolio and more on the withdrawals they make from it. Preserving capital is crucial during the withdrawal period to ensure the funds last throughout retirement. Investors often shift to more conservative investments, which typically provide lower yields.

4. Sequence of Returns Risk: If the market experiences poor returns early in retirement, it can have a significant negative impact on the portfolio due to withdrawals being made during that time. To account for this risk, financial planners often assume lower yields in the withdrawal phase to ensure a buffer against the possibility of poor market performance in the early stages of retirement.

In summary, the primary reasons for lower yield assumptions during the withdrawal period are the focus on stability, capital preservation, reduced risk tolerance and the impact of withdrawals on the remaining portfolio.