| Age | Investments/Savings | Income | Living costs |
|---|
The living costs are calculated using the value for contributions
towards saving:
living costs = salary * (100% - contributions). From
there, for each year the salary is increased by the specified
factor and the living costs by inflation rate.
The annual savings are calculated by subtracting living costs from
the salary and then adding the result to the total savings. We
multiply each year's total savings by the annual rate of return.
Specifically, the total savings available for any given year is
equal to
(previous year's total savings) * rate of return + current
year's savings. This is similar to how a savings account typically works, and
for simplicity, we apply the same logic to investments.
There is a simplification in how the tax is applied, however. Most people invest in ETFs or mutual funds and do not withdraw from these investments until needed. Therefore, the calculator assumes that taxes are paid only when you sell your investments (capital gains tax) and ignores taxes on dividends. This is partly because the applicable tax depends on the country; it might be income tax or capital gains tax. To account for this inaccuracy, you can use a slightly lower value for the rate of return.
Note that this calculator does not consider expenses like a mortgage, which would end after a certain number of years. To account for that, you could, for example, subtract the annual mortgage payments from your salary instead.
Once living costs exceed income, we start using our savings. In this case, we use the tax rate to calculate how much we need to withdraw or sell to cover the deficit for that year. This is another simplification because, in the case of investments, it might not always be possible to sell the exact amount needed.