Click to immediately use our retirement calculator.
However, to better understand what a retirement calculator will tell you, read on.
The purpose of every retirement calculator is to tell you one or both of these two pieces of information:
- how much you need to save (usually per month) to be able to retire or
- how big of a nest egg you must have in order to retire
The retirement calculator does these calculations by accounting for the retirement assets you already have:
- savings in a retirement plan such as 401k or IRA
- monthly income you will receive from a pension or from social security or retirement deferred compensation plan
- non-retirement assets that you have: stocks, bonds, mutual funds, notes, etc
- usable equity in your home that you may have available should you plan to trade down and release equity for investment or take a reverse mortgage
The retirement calculator also takes into account the age at which you want to retire and your estimated life expectancy. While it may seem like the biggest issue is the financial resources you bring into your retirement that will impact your retirement comfort, it is actually not these financial aspects. The biggest impactors of your retirement success are your retirement age and the number of years you spend in retirement. Therefore, when using a retirement calculator, we suggest you run the scenario several times using different life expectancies and also see what happens when you adjust your retirement age from say age 64 to age 66. You may be very surprised at the difference you see.
The best retirement calculators are usually NOT those found on-line. The best ones are software that you buy (not very expensive) as they allow for much more sophisticated analysis. For example, while the free online retirement calculator will give you an estimate of the amount you need to save or the nest egg you need to meet your retirement income goals, the purchased retirement calculators often employ Monte Carlo simulations to account for multiple future scenarios. Unlike the free online retirement calculator that generate ONE average outcome, Monte Carlo simulations illustrate a range of possible outcomes with their probabilities. Y0u can thus see the probability of a particular scenario occurring.
Note that any retirement calculator has weaknesses because it must rely on assumptions such as:
- Expected annual returns for the asset classes you select (e.g. stocks, bonds, etc). Some retirement calculators ask you for these estimates while others have built in assumptions. Either way, if the assumption is that stocks generate a 10% return over the ext 30 years and they generate an 8% return, you retirement may not go as planned.
- Expected assumptions about asset class volatility and correlations with other classes may not go as assumed. For example, even if stocks are assumed to generate 10% annual returns over your retirement and they do, if the stocks lose 8% for each of the first 3 years of your retirement, your retirement goals will still not be achieved because the pattern or sequence of returns has a significant impact on your retirement calculations.
- No one knows what income tax rates will be. When you make your assumptions, it is best to assume that rates will be higher in the future (how else can the government close the deficit)?
- No one knows what the inflation rate will be. Closely related to this is the value of the US dollar and most retirement calculators do not account for that. If you plan to travel abroad in retirement and the US dollar is worth 20% less, then it means your travel costs abroad will cost you 25% more. The value of the dollar plus the impact of domestic inflation are two other uncertainties that a retirement calculator may not account for or may need to rely on estimates that prove inaccurate.
Before you come to the conclusion that using a retirement calculator is a waste of time, we urge you to reconsider.
By going through the exercise and thinking about the components and seeing how the various retirement variables interact, any retirement calculator will give you a much better sense of reality for your retirement goals.