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:
1. how much you need to save (usually per month) to be able to retire or
2. 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 your desired retirement age and your estimated life expectancy. While it may seem like the biggest issue in retirement calculations 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 retirement analysis. For example, while the free on-line 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 on-line retirement calculators 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 because of the above uncertainties, we urge you to reconsider.
By gong 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.
I really appreciate this explanation on how to use a retirement calculator. I'm fairly young and must admit that I do generally scoff at the thought of using some kind of calculator to estimate the amount of money I'll need to save in order to reach my retirement goals given the number of unpredictable variables that can potentially effect my retirement fund.
It seems though, in the end, these kind of calculators can be a great way to start looking at retirement and set a base number for your monthly or yearly retirement savings. I feel like it's probably best, given that by the time I retire social security will likely be a distant memory, for me to invest as much as I possibly can for the next couple of years, but it doesn't hurt to have somewhere to start. Thanks for this!
Virtual Assistant Australia says
The retirement calculator is very useful. The article made me think that working for yourself as a contractor vs working for a company is very different especially if the company pays your super (e.g. puts money away as part of the salary package for your retirement). When working for yourself you really do need to use the calculator and factor this in. But as a contractor its all too easy to keep the money for now especially when you have bills to pay.
Mr. Maroon says
Retirement calculators are such a valuable tool for those already retired and approaching retirement. It is important for those approaching retirement to run multiple calculations with varying returns and withdrawals to get a real idea of what a realistic retirement looks like. Try running a few different scenarios in these calculators and then contact a financial planner to set up an appointment and see how their projections compare to yours. Thanks for the post
Now I can see Virtuals point - but it does implie that the company infact HAS to pay you "super", I don't really think that's the case for most of the people, so even if you are gainfully employed you still should think about some kind of "private retirement plan" by consulting the calculator. When your a contractor - sure you have to save up the retirement money all by yourself. But IF your a good/awsome contractor you will earn more that by beeing employed and therefore can afford to save some money for your retirement - just my 2 cents...
"The best retirement calculators are usually NOT those found on-line. "
True enough! 😉
video production says
thanks for this explanation on how to use a retirement calculator.
Tero Nykanen says
This article about Retirement Calculator was an eye opening. We have here in Finland a bit different system, so it´s interesting to read about how things are done in different countries.
i never knew there would be such a thing as a retirement calculator. it sounds pretty cool btw =)
Thanks for the article! I've been pretty worried about how to use one, and the whole ordeal seems to become increasingly confusing as I get closer and closer to retirement. I once had a CPA tell me to forget all about Social Security! I won't use it as an excuse to save less, but at least I know I'm not the only one having problems .
Lytham Hotels says
People often look at the nest egg you must have in order to retire, but sometimes the urge to retire just outweighs the financial restraints, and people just pack up and go to live by the sea!
Tarot card meanings says
hey thanks for the retirement calculator! I have been looking for this for quite some time already as I need to plan when I can retire given my current income.
A lot of people who use retirement calculators fail to account for inflation...which can eat away a lot the future value of your retirement nestegg.
Plastic Scrap Guy says
Thanks for sharing this calculator! Although I'm still far away from retirement, I'm working very hard toward retiring early.
Asbestos Mesothelioma Attorney says
I read an article about the top 10 states to retire - in terms of retirement income. Of course some states have no personal income income tax and they all tax retirement income at different rates.
Not something I ever thought about before, but as you use a retirement calculator it might be something to consider - what state do you plan to be in, at what rate do they tax the different sources of retirement income. - As if there weren't enough factors to bear in mind already!
Public Private Partnerships says
Retirement is such a touchy topic and often not looked at subject for younger adults. Sadly, we sometimes wait until it is too late. This calculator is a great awareness tool!