Overview

Main Menu Name: Income

Calculates the effect of a specified rate of inflation on capital where a constant inflation-adjusted income is desired. Similar to the Assets calculator, this calculator is tax sensitive and can be used to illustrate the impact of income taxes upon retirement planning.

In this article:

• Background
• Why should I use this calculator?
• Getting Started
• Entering Data
• Results

Background

Inflation occurs when it costs more to buy goods and services than it did before. More technically, inflation is a rise in the prices of goods and services. The inflation rate is the rate of change in prices.

A primary indicator of the inflation rate in the United States is the Consumer Price Index that tracks changes in prices paid by consumers. Similar measures such as the Producer Price Index measure inflation as it affects suppliers of goods and services.

Individual Retirement Accounts (IRAs) and other tax-deferred retirement funds may be able to provide a larger income for a longer period of time if the initial earnings are more than is needed to provide the desired after-tax income because the excess earnings can be accumulated and reinvested without any current tax on those retained earnings.

Why should I use this calculator?

Use this calculator to compare earnings after tax with the inflation-adjusted income necessary to maintain the original desired after-tax income. The annual surplus (or deficit) becomes readily apparent.

Getting Started

Inflation occurs when it costs more to buy goods and services than it did before. More technically, inflation is a rise in the prices of goods and services. The inflation rate is the rate of change in prices.

A primary indicator of the inflation rate in the United States is the Consumer Price Index that tracks changes in prices paid by consumers. Similar measures such as the Producer Price Index measure inflation as it affects suppliers of goods and services.

The following table indicates yearly increases in the CPI:

Entering Data

1. Fund Value:  Enter the initial value of the fund.
2. Assumed Rate of Return:  Enter the projected rate of return.
3. Assumed Inflation Rate:  Enter the projected inflation rate.
4. Applicable Income Tax Bracket:  Enter the applicable income tax bracket.
5. Desired After-Tax Income:  Enter the desired income after taxes.
6. Is Fund Tax Deferred?:  Choose 'Yes' if there is a nontaxable investment.
7. Nontaxable Investment:  If the fund is tax deferred, enter the dollar amount that will not be taxable income when the fund is distributed. This would be the amount of any non-taxable contributions to an IRA or other retirement fund, or the investment for a tax-deferred annuity.

Results

The program calculates the earnings of the fund before tax, the desired income (with inflation adjustments), the portion of the earnings that must be distributed to produce the desired after-tax income, and if the current earnings of the fund are less than what is needed to produce the desired after-tax income, the additional amount that must be distributed out of the initial investment or accumulated earnings of the fund.

If the fund is tax deferred, then the additional amount that must be distributed is allocated proportionately between the nontaxable investment and any tax-deferred accumulated earnings, and the amount of the taxable accumulated earnings that is distributed is adjusted to provide the desired level of after-tax income.

The fund increase or decrease is the earnings of the fund less the total distributions and, if the fund is not tax deferred, the tax on any undistributed earnings.