A retirement calculator can be a powerful tool for preparing your financial future. The intelligent calculator from EvolveMyRetirement® goes way beyond simple straight-line projections. It arrives at a comprehensive optimised strategy that considers pensions, savings, investments, and even your partner’s finances; and importantly, it takes account of uncertainty. But to get the most value out of it, it’s important to understand what the results really mean.
Disposable Income vs. Discretionary Spending
The EvolveMyRetirement® retirement calculator talks a lot about “Discretionary Spending”, but very little about “Disposable Income“. People often mistakenly use these terms interchangeably. But they’re actually quite distinct.
Your Disposable Income is your total income minus taxes. In other words, it’s that portion of your income that you can actually use. You might not spend all of it; you might also save or invest some of it. You could even end up spending more than your Disposable Income, in which case you’d need to borrow to cover the shortfall.
On the other hand, Discretionary Spending represents an amount of money that you actually spend on non-essential items such as holidays, hobbies or leisure activities. The other type of spending is Essential Spending, on things such as housing, bills, food or healthcare. The calculator may show that you could afford more discretionary spending than you currently do. That doesn’t mean you must spend it; it’s simply highlighting your financial flexibility.
In short:
- Disposable Income is net income after deduction of taxes.
- Discretionary Spending is money you actually spend on non-essential items.
When is an income not an income?
When you make a withdrawal from a Defined Contribution (DC) pension, some or all of it will be taxable. This is because taxation is deferred from the time you pay money in until you take money out. Typically, you pay money in out of earned income such as salary, on which tax will have already been paid. When you take money out, you’re transferring funds you already own. So in a sense it’s not really income, even though the taxman may tax it as income.
Our retirement calculator recognises this. If you run a scenario, any withdrawals from a DC pension don’t show as income on the chart, even though some of it may be taxable. Income is only shown for fresh money coming in, such as salaries, state pension, and Defined Benefit (DB) pensions. The calculator treats DC withdrawals as a transfer into cash, which it can then use either for spending or for reinvestment.
ISAs and other investments may also be transferred into cash, by making withdrawals when necessary to fund spending. Unlike DC pension withdrawals, there’s never any income tax to pay, though there may be capital gains tax in the case of non-ISA investments.
Probability of success from the retirement calculator
With most other retirement calculators, there’s no uncertainty in future projections. It typically tells you exactly how many years you have before your plan runs out of money. There are numerous questions that still need answering with this type of planning, such as:
- What if there are big dips in investment returns?
- What if you live longer than expected?
- What if there’s a spike in inflation?
- What if you need to fund full-time care?
- Could you afford to spend more and still be safe?
Using EvolveMyRetirement®, there are no straight-line projections. Uncertainty is central to how it works. It evaluates every plan using Monte Carlo Simulation, in which thousands of different scenarios are projected. It randomly generates each scenario based on the laws of probability. One of the most valuable outputs is the probability of success: the likelihood that your plan will sustain itself throughout retirement.
When you optimise your strategy, EvolveMyRetirement® strikes a balance between discretionary spending and the risk of running out of money. The actual balance depends on the attitude settings you’ve entered, such as your risk tolerance and your desire to leave a legacy. If you’ve indicated high risk tolerance, then optimisation may result in a significantly higher level of discretionary spending than you’re currently enjoying. If your reaction to this is that it’s too high, then it’s likely that the attitudes you previously set don’t reflect what you actually think. But if you can afford to spend more while still keeping a high probability of success, maybe you should take a fresh look at your budget.
Making sense of the retirement calculator results
To get the most from the results of our retirement calculator, you need to:
- Check your settings: The results can only be as accurate as what you’ve entered. Take time to understand what the inputs are for.
- Learn what the outputs mean: There’s extensive online help with useful guidance, as well as an AI Assistant trained in our calculator.
- Understand the purpose of the tool: The calculator’s goal is not to dictate your lifestyle, but to show what’s possible while keeping your plan secure.
Understanding the results of a retirement calculator isn’t just about interpreting numbers, it’s about gaining confidence in your financial future. By recognising the difference between disposable income and discretionary spending, appreciating how withdrawals are treated for tax purposes, and paying attention to the probability of success, you can see the bigger picture of what’s possible. The EvolveMyRetirement® retirement planning calculator is designed to empower you with clarity, flexibility, and peace of mind, helping you make informed choices that align with your lifestyle and values. In the end, it’s not about predicting the future with certainty, but about preparing for it with confidence and control.