Projections assume a constant nominal annual return and a constant annual inflation rate over the entire horizon. Returns are converted into appropriate per-period rates based upon the selected contribution frequency and are applied consistently to both the Existing Portfolio Component and the Periodic Net Cash Flows Component.
If the Starting Date is not January 1, the first projection row represents a partial calendar year from the Starting Date through December 31 of that year. Returns and, if elected, contributions for that first year are proportionally scaled based upon the fraction of the year that remains. The Year # column labels this as a partial year, and first-year contributions can be treated as pro-rated, zero, or full, according to the selected option.
If you specify an "Amount Added to Portfolio on a Per Annum Basis Equivalent ($)", contributions are modeled according to the selected contribution frequency and the timing conventions described in the main documentation (for example, contributions applied at the beginning of each period for certain assumptions and at the end of each period for others). If you also specify a "Date on Which Contributions Stop", annual contributions (if any) continue through that date. In the year contributions stop, the treatment for that year (full contribution, pro-rata contribution, or no contribution) is controlled by your selection in the "Contribution Treatment in the Year Contributions Stop" options, and all subsequent years assume no further additions.
If you enable drawdowns, the model determines a baseline annual withdrawal amount in the first year in which drawdowns apply by multiplying the Total Portfolio Value at Year-End (Nominal Dollars) for that year by your selected Drawdown Rate (%). If the Drawdown Start Date falls in the middle of a calendar year, only a pro-rated portion of that baseline amount is withdrawn in the first drawdown year, based upon the fraction of the year remaining from the Drawdown Start Date. After the baseline withdrawal is established, subsequent full-year withdrawals are not recalculated as a percentage of the then-current portfolio value. Instead, the baseline withdrawal remains fixed in nominal terms unless you specify an Annual Withdrawal Inflation Adjustment (%), in which case the withdrawal amount is increased each year by that inflation adjustment rate. Withdrawals never step down in nominal terms; they only cease once the portfolio is exhausted.
If, in any year, the scheduled withdrawal exceeds the portfolio value immediately before the withdrawal is applied, the withdrawal is capped at the remaining portfolio value and the portfolio is set to $0.00 thereafter. In all following years, the portfolio value and withdrawals are modeled as $0.00.
The calculator tracks two components of wealth: the Existing Portfolio Component (the value of assets you already have at the Starting Date, grown forward) and the Periodic Net Cash Flows Component (the cumulative effect of all contributions and withdrawals over time). Contributions and withdrawals are allocated proportionally between these components based upon their relative size at the time of each transaction so that the attribution of wealth between existing capital and net cash flows is maintained consistently throughout the projection.
All dollar figures are shown in nominal dollars unless explicitly labeled as inflation-adjusted. Inflation-adjusted figures are obtained by discounting nominal values using the constant annual inflation rate you enter and are intended to represent purchasing power in "today's dollars" as of the Starting Date. The calculator uses the standard relationship between nominal, real, and inflation rates: (1 + r_real) = (1 + r_nominal)/(1 + π). This means real return is slightly different from simply subtracting inflation from nominal return. For example, a 10.00% nominal return with 3.00% inflation implies a real return of approximately 6.80% because (1.10 / 1.03) − 1 ≈ 0.06796 (6.80%), which is slightly less than the 7.00% obtained by simple subtraction (10% − 3%).
The projections assume a smooth, constant compounding rate and ignore sequence-of-returns risk. In real markets, the order in which good and bad years occur can have a profound effect on actual outcomes, particularly when large contributions or withdrawals are occurring. Two investors with the same average annual return over a given horizon can experience dramatically different wealth levels depending upon the timing of returns. This calculator does not attempt to model those path-dependent effects.
If the resulting calculation includes a year in which the age of 65 is attained, that row is highlighted in green to denote what remains arguably the most appropriate age to model traditional retirement for most people under most circumstances.