How We Calculate Your Retirement Plan

The one-of-a-kind formula behind My Retirement PlanSM

Wells Fargo uses a patent-pending algorithm to determine your proposed retirement saving goal and savings plans.

  • First, we make projections about your income at retirement age using the information you enter, as well as information we derive from various government-data sources. We then estimate how much money you’ll need each month in retirement. This amount accounts for inflation and is based on your income replacement rate, which is the percentage of your preretirement income you expect to live on during retirement. (We use the average income replacement rate of 80% of your projected income the year prior to retirement unless you change this field in the Calculator Assumptions tab.)
  • We calculate the value of any income sources that begin at or after retirement age, such as a pension or Social Security, after calculating your gross retirement need. We subtract this amount from your gross retirement need to determine your retirement saving goal. We then assume all current and preretirement income sources will grow until retirement, and subtract this amount from your retirement saving goal to determine how much you need to save.
  • Then, we determine how much you’ll need to contribute between now and retirement to meet your retirement saving goal for both the recommended plan and Ease into Savings plan. The recommended savings plan is based on a percentage of income over time, while the Ease into Savings plan uses a linear increase from your selected starting point.
  • All retirement savings, contributions, and future income are assumed to be invested. Expected returns are based on Wells Fargo capital market assumptions (adjusted for typical investor expenses) and an appropriate target-date glide path. Returns vary over time based on your investment style and number of years until retirement. You may change your investment style on the Calculator Assumptions tab.

How we come up with the numbers

Estimating your income need at retirement

To determine your income need at retirement age, we begin by estimating your income at retirement.

  • We first map your current annual income to one of several hundred possible growth-rate paths based on your educational level, current annual income, and retirement age.
  • We calculate the growth-rate paths through regression analysis of the U.S. Census Bureau’s Survey of Income and Program Participation. The growth-rate paths are in nominal dollars, which allows us to account for inflation effects.
  • We then use this path to estimate what your income will be at retirement.

To estimate your monthly retirement-income need, we multiply your estimated income at retirement by your income replacement rate. To ensure your real income remains constant throughout your retirement, we apply your selected inflation rate to this amount annually through your life expectancy. We then calculate your gross retirement need as the present value of this cash flow.

Calculating your total retirement saving goal

To calculate your total retirement saving goal, we start with your gross retirement need and subtract the projected value of your in-retirement income sources. To calculate the value of your in-retirement income sources, we apply discount factors to these income sources derived from the tool’s assumed rates of return.

To determine the value of what you will have saved by retirement age, we start with your current retirement savings, monthly contributions, and any future income you will receive before retirement age. We then calculate the future value of these income sources using the rates of return assumed in the tool.

Creating your savings plans

Your recommended savings plan is calculated by solving for the constant percentage of annual income you need to save over time to achieve the portion of your calculated retirement saving goal that will not be covered by your current savings and future income you will receive before retirement age. We assume your income increases over time following the growth-rate path described in the “Estimating your income need at retirement” section above.

If your current monthly contribution is greater than the tool’s recommended first-year contribution amount, we recommend maintaining this saving rate until retirement. In this situation, we display your calculated income need (what we estimate you will receive) and your estimated total retirement savings.

We calculate the Ease into Savings plan using a linear model that determines incremental contribution increases based on your selected starting contribution. To achieve your retirement saving goal, the Ease into Savings contribution increases are more aggressive than the increases shown in the recommended plan, and require higher contribution amounts later in life.

The Cost of Starting Lower amount is the sum of the differences in contribution amounts over time between the recommended plan and Ease into Savings plan.

Estimating rate of return and inflation

The expected rate of return on investments is based on Wells Fargo’s capital market assumptions (adjusted for typical investor expenses) and assumes an investment allocation that aligns with your selected investment style and becomes more conservative over time. The assumed inflation rate is 3.0% unless you changed it on the Calculator Assumptions tab.

We assume your portfolio is comprised of the three broad asset classes — equities, fixed income, and money market. The allocation weighting assigned to each asset class is determined by your selected investment style (you may adjust your investment style on the Calculator Assumptions tab) and years until retirement.

  • Moderate: We assume moderate investors have a 90% equity exposure when they are 35 years or more from retirement age, and this amount declines every year, passing 28% at retirement and reaching 20% 10 years into retirement, at which point the equity exposure holds constant. This results in a declining expected annual return that decreases from 7.4% to 4.6% over time.
  • Aggressive: We assume aggressive investors have a 90% equity exposure when they are 25 years or more from retirement age, and this amount declines every year, passing 49% at retirement and reaching 25% 20 years into retirement, at which point the equity exposure holds constant. This results in a declining expected annual return that decreases from 7.4% to 4.8% over time.
  • Conservative: We assume conservative investors have a 90% equity exposure when they are 45 years or more from retirement age, and this amount declines every year, passing 20% at retirement and reaching 15% 10 years into retirement, at which point the equity exposure holds constant. This results in a declining expected annual return that decreases from 7.4% to 4.4% over time.

Estimating market performance

The calculations in your plan assume average market performance between now and your retirement age. To explain how your retirement plan could be affected by below-average market performance, Wells Fargo ran a simulation that generated 1,000 outcomes for each of the three asset classes described in the “Estimating rate of return and inflation” section above.

We then ran your current retirement savings, future income, and recommended savings plan through each simulation outcome and displayed the results graphically in the section titled, “How could market performance affect my recommended plan?” The graph displays two values. The first displays the value achieved in 50% of market scenarios (average performance) and second displays the value achieved in 80% of scenarios (below-average performance).

Because your recommended plan assumes average market performance, below-average performance will result in a lower accumulated retirement savings amount. Contributing more than your recommended monthly amount will help protect your retirement portfolio against poor market performance.

Planning with a spouse or partner

If you select the calculator’s option for planning with a spouse or partner, we project each person’s income at retirement age and monthly retirement income need separately and then combine all retirement savings and future income to display one consolidated plan. All plan calculations and return rates are based on the retirement age of the person furthest from retirement.

The growth-rate path used to calculate the recommended savings plan is determined by combining the annual projected income values for each individual. We assume the couple will make the full monthly contribution amount until both people retire. The total retirement saving goal, projected monthly income need, and probability of success are based on the first year both people are retired.

Given the nature of our income projections, we require at least one person to have current annual income of at least $10,000.

My Retirement Plan Sign On

Linear Increase

An increase defined by a fixed amount. For example, an Ease into Savings plan increases your saving amount by a fixed dollar amount each year.

Target-Date Glide Path

The plan that defines how the asset allocation of a target-date fund changes over time. Target-date funds are mutual funds that automatically adjust and become more conservative as the fund gets closer to the target date.

Investment Style

How aggressively or conservatively you invest in the financial markets, as determined by your risk tolerance. My Retirement Plan provides three investment style choices on the Calculator Assumptions tab: conservative, moderate, aggressive.

Regression Analysis

A statistical method for analyzing the relationship between several variables, including a dependent variable and one or more independent variables.

Nominal Dollars

An actual dollar amount that does not account for inflation.

Linear Model

A statistical formula that predicts a fixed or a constant increase or decrease.

Investment Allocation

Also referred to as “asset allocation,” the process of dividing investments among different types of assets (e.g., stocks, bonds, cash, real estate) to create an optimal risk/reward tradeoff for meeting an investor’s specific goals.