Methodology
How RetireWise calculators work under the hood. All calculations run locally in your browser unless you opt into the advanced simulation engine.
Monte Carlo Simulation
Standard (Client-Side)
The default Monte Carlo engine runs 500 iterations entirely in your browser using JavaScript. Each iteration simulates a year-by-year portfolio path from your current age through life expectancy.
Return Generation
Annual returns are drawn from a normal distribution using the Box-Muller transform. The mean and standard deviation are based on historical data for a 60/40 portfolio (10.26% nominal S&P 500 return, 12.7% standard deviation, sourced from 1928-2023 data).
Success Criteria
A simulation is "successful" if the portfolio balance remains above $0 through the end of life expectancy. The success rate is the percentage of iterations where money doesn't run out.
Percentile Bands
At each simulated year, all iteration balances are sorted and the 10th, 25th, 50th (median), 75th, and 90th percentiles are extracted. These form the fan chart. A wider band means more uncertainty in outcomes.
Advanced (Python Microservice)
The "Advanced" button sends your inputs to a Python/NumPy microservice that runs 10,000 iterations with more sophisticated statistical models. If the service is unavailable, it falls back to the standard engine automatically.
Log-Normal Returns
Returns are modeled as r = exp(μ + σZ) - 1, which prevents returns below -100% and better reflects the multiplicative nature of market growth compared to a simple normal distribution.
Fat Tails (Student's t)
Market crashes occur more frequently than a normal distribution predicts. We use a Student's t distribution with 5 degrees of freedom for equity returns, producing heavier tails that better capture events like 2008 or 2020.
Correlated Multi-Asset Returns
For portfolio simulations, a Cholesky decomposition of the 9x9 asset class correlation matrix generates properly correlated returns across stocks, bonds, international, REITs, and other asset classes. This ensures that when stocks fall, bonds don't unrealistically rise in lockstep.
Regime Switching
An optional 2-state Markov chain models bull and bear markets separately. Bull markets average 14% return with 12% volatility (~6.7 year average duration). Bear markets average -5% return with 25% volatility (~2.5 year duration). Transition probabilities determine the likelihood of switching between regimes each year.
Historical Block Bootstrap
An alternative to parametric models: 5-year blocks are randomly sampled from actual S&P 500 annual returns (1928-2023). This naturally preserves serial correlation, fat tails, and volatility clustering without imposing distributional assumptions.
Retirement Readiness
Readiness Score
The score compares your projected nest egg at retirement (savings compounded at your expected return, plus annual contributions) against the lump sum needed to fund expenses through life expectancy. A score of 100 means your projected savings exactly match the required amount. The required nest egg is calculated by summing inflation-adjusted annual shortfalls (expenses minus Social Security and other income) discounted at the post-retirement return rate.
Withdrawal Modeling
In retirement, annual expenses are adjusted for inflation each year. Social Security benefits begin at the specified claiming age (also inflation-adjusted). The portfolio earns the post-retirement return rate, and withdrawals are taken annually to cover the gap between expenses and income.
Compound Growth
Computes future value using the standard compound interest formula with periodic contributions. Supports monthly, quarterly, or annual compounding frequencies.
Contribution Increases
Monthly contributions can be set to increase by a fixed percentage each year (e.g., 3% annual raise), compounding the contribution schedule alongside investment returns.
Real vs. Nominal Values
The "real value" column deflates the nominal balance by the specified inflation rate each year, showing purchasing power in today's dollars: realValue = nominalValue / (1 + inflation)^years.
Tax-Deferred Toggle
When toggled off, a capital gains tax rate is applied to annual growth, simulating a taxable brokerage account. When on, growth compounds without annual tax drag (simulating a 401(k) or IRA).
Social Security Optimization
Benefit Adjustments
Benefits are adjusted based on SSA rules. Claiming before Full Retirement Age (FRA) reduces benefits by 5/9% per month for the first 36 months early, and 5/12% for each additional month. Claiming after FRA earns 8% per year in delayed retirement credits, up to age 70.
Break-Even Analysis
For each claiming age, cumulative benefits are calculated year by year. The break-even age is where total cumulative benefits from a later claiming age surpass those from an earlier one. Benefits are adjusted for inflation using the COLA rate.
Lifetime Benefits
Total lifetime benefits are summed from the claiming age through life expectancy, with each year's benefit adjusted by the specified COLA rate. This helps compare the total payout across different claiming strategies.
Roth Conversion Analysis
Tax Calculation
Uses 2024 federal tax brackets for all four filing statuses. The conversion amount is added to taxable income (after standard deduction) and run through the progressive bracket system. The incremental tax cost is the difference between taxes with and without the conversion, plus state taxes at the flat rate you specify.
After-Tax Comparison
Two projections run side-by-side: one where you convert (paying taxes now from outside funds) and one where you don't. At retirement, the traditional IRA balance is taxed at your expected retirement rate, while Roth balances are tax-free. The net benefit accounts for the upfront tax cost versus future tax savings.
Optimal Amount
The calculator identifies the conversion amount that fills your current tax bracket without pushing you into the next one. This maximizes the benefit of converting at your current marginal rate.
IRMAA Warning
If your Modified Adjusted Gross Income (MAGI) with the conversion exceeds Medicare IRMAA thresholds ($103,000 single / $206,000 joint for 2024), the calculator flags the estimated annual surcharge. IRMAA is based on income from two years prior, so this is a forward-looking estimate.
Portfolio Builder
Portfolio Statistics
Expected return and volatility are calculated as the weighted average of each asset class's historical return and standard deviation. The Sharpe ratio is (expectedReturn - riskFreeRate) / standardDeviation using a 4.5% risk-free rate.
Asset Classes
Nine asset classes with historical return and volatility data: US Total Stock Market, S&P 500, International Stocks, Emerging Markets, US Total Bond Market, International Bonds, TIPS, REITs, and Money Market. Data sourced from long-term historical averages.
Pre-Built Portfolios
Templates include the classic Three-Fund Portfolio, Boglehead Four-Fund, US-Only 60/40, Target Retirement, All-Weather, and others. Each is categorized as conservative, moderate, or aggressive based on equity allocation.
Data Sources
- •S&P 500 returns (1928-2023) — Damodaran dataset, NYU Stern School of Business
- •10-Year Treasury returns (1928-2023) — Federal Reserve Economic Data (FRED)
- •MSCI EAFE returns (1970-2023) — MSCI index data
- •Tax brackets — IRS Revenue Procedure 2023-34 (2024 tax year)
- •IRMAA thresholds — CMS Medicare Part B/D premium tables (2024)
- •Social Security formulas — SSA benefit computation methodology
Disclaimer: RetireWise calculators are for informational and educational purposes only. They are not financial advice. Past performance does not guarantee future results. Monte Carlo simulations illustrate a range of possible outcomes based on historical data and statistical models — actual results will differ. Tax laws change frequently; consult a qualified tax professional for advice specific to your situation.