Retirement Bridge Calculator (before pension starts)

Understanding the retirement bridge calculator — concept and principle

If you stop working before your public or workplace pension begins, you need a separate pot of money to cover the years in between. This calculator estimates the size of that bridge fund: the present value of the yearly gap between your spending and any other income, from your retirement age until the pension starts, assuming a modest return on the money set aside.

How it is calculated

• Years to bridge: n = pension start age − retirement age.
• Yearly gap: g = annual spending − other income during the bridge.
• Bridge fund needed (withdrawals at the start of each year, return r): g × (1 − (1 + r)^−n) ÷ r × (1 + r).
• If r = 0, the fund is simply g × n.

The calculator also shows the simple total g × n for comparison.

The principle

The bridge is an annuity due: a fixed amount taken at the beginning of each year for a known number of years. Money not yet spent keeps earning a return, so you need less than the simple total. Because the period is short and the spending is near, the fund is usually kept in lower-risk assets such as cash and high-quality bonds. A market crash just before or during these years would otherwise force you to sell growth assets at low prices, which is the core of sequence-of-returns risk.

Worked example

Default inputs: retire at 58, pension at 65, spending $45,000 a year, other income $5,000, return 3%.

1. Years to bridge: 65 − 58 = 7.
2. Yearly gap: 45,000 − 5,000 = $40,000.
3. Simple total: 40,000 × 7 = $280,000.
4. Annuity factor: (1 − 1.03^−7) ÷ 0.03 × 1.03 = 6.4172.
5. Bridge fund: 40,000 × 6.4172 = $256,688.

How to read the result

The difference between the simple total and the bridge fund is what the return contributes; at low returns it is small. If the required fund exceeds what you have outside retirement accounts, options include working longer, part-time income, lower spending, or claiming a reduced early pension. Check whether retirement accounts can be accessed before the pension age without penalties in your country.

Common mistakes

• Using today's spending without allowing for inflation over a long bridge.
• Forgetting health insurance costs before public coverage starts.
• Assuming a high stock-market return on money you will spend within a few years.
• Ignoring taxes on withdrawals from the bridge fund.

Frequently asked questions

Why keep the bridge money separate?

It must be available on schedule, so it should not depend on a market that may fall right when you need it.

Should I include inflation?

For long bridges, enter a real return (return minus inflation) so the fund keeps up with rising prices.

When does the Korean National Pension start?

It depends on birth year; for people born in 1969 or later the normal start age is 65.

Sources: National Pension Service of Korea, old-age pension eligibility · Brealey, Myers and Allen, Principles of Corporate Finance (annuity due)