An Income Generating Retirement Plan - Excel Financial Model

This tool is very simple to use. If you were trying to do the math for figuring out if your investments were going to generate enough annual income for you to live off of, you may find that this tool will help you in retirement planning. The type of investments this is geared for are those that produce income each year. There is logic to adjust for inflation as well.

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retirement planning

Normally, when you are in your younger years, you may want to be invested in things that you think will grow because you are already generating income from your job or whatever you do for money. It is not as important that those things generate immediate income. As one ages, things like REITs become more attractive as they produce monthly / quarterly income but don't grow quite the same.

When you get older and are looking to retire and no longer have a job or way to actively make money, all you may be able to rely on to pay your monthly bills is income from your retirement. You could just start spending your retirement, but that will then start to deplete and there will be nothing left at the end.

So, the most common option that people take for retirement planning is looking at what they can invest their savings in so it maintains the principal and pays some kind of dividend or profit share on a quarterly/annual basis. This financial model assumes that the principal is left untouched and the dividends or income generated from the principal is not reinvested and instead used to live off of.

There are lots of dynamic inputs and logic to plan out various investments that have varying tax effects and annual yields, but one of the more sophisticated parts of this Excel model is to show the effect inflation has on the buying power of your annual income.

Inflation just means the buying power of your money drops and it is a bit of a hidden cost of holding cash. The future is unknown as nobody knows what will happen to affect the amount of inflation that happens. You might even have deflation for some time. If you keep making the same income for 50 years, the expenses will start to become a greater portion of the income. It is probably the case that the amount will be worthless. Think of the cost of a loaf of bread 50 years ago compared to today.

So, this model will show you at what point your future earnings will no longer be enough to cover the planned expenses, holding all else equal. It is not a perfect calculation but does help in planning out the effects of inflation on your income from investments.

One thing that might reduce the effect of inflation on your retirement income from investments is if the % yields start to go up for your investments. That means if you end up having the opportunity to re-invest in say treasuries each year or CDs, the rate of return may increase from what it has been in order to offset inflationary effects.

It is a highly complex system with many moving parts, but this tool should help with figuring out generally how much investments/yield you will need to cover your expenses over time assuming you will not be working.