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RETIREMENT CALCULATOR
A retirement planner or calculator can assist you in calculating how much you may be able to spend each month and how long your savings will last. Whether just starting to plan for retirement or nearing the age of required minimum distributions, the retirement calculators are there to help. Choose the appropriate calculator available on web to compare saving in a 401(k) account vs. a Roth IRA, determine the impact of changing your payroll deductions, estimate your Social Security benefits, and more, as you figure what it takes to save toward a secure retirement.
There are many other criteria besides spending that can be used to categorize retirement calculators. Examples of these criteria include: tax calculation method, asset classes included as investments, Social Security claiming guidance, types of tax-advantaged savings plans, and types of annuities. The restriction of these tables to just spending model categories does not imply that this aspect of the calculation is any more important than the others mentioned! One of the most important characteristics of a retirement calculator is the method used to simulate potential future investment returns.
Doing a retirement savings needs calculation is an important first step to achieving your retirement goals. Those who have done a retirement needs calculation continue to be more likely than those who have not to say they are veryconfident about having enough money for a comfortable retirement. Finally, the retirement savings calculation appears to be a particularly effective tool for changing retirement planning behavior. Make sure price is not an issue while chosing a calculator. There are calculators available at all fidelity levels. If you have a preferred platform, that may help filter your list. Most importantly, decide how accurate an answer you need, and how much time you want to invest in getting it:
If you just need a simple answer to whether your savings are roughly on track to retire in a certain time frame, you should start with the low-fidelity calculators to get quick answers.
If you want to fine-tune the results more to your specific situation, perhaps looking at how your mixture of assets and future financial events will impact your wealth, start with the medium-fidelity calculators.
If you have substantial assets and need to fine-tune a tax or withdrawal strategy in retirement, or you want to model a range of future life events and compare alternative courses of action, use a high-fidelity calculator.
In any case, you’ll want to use more than one calculator, to confirm your results. For the low-fidelity calculators, I’d run three programs before drawing any conclusions, because they are so simple and easy to use. For the medium-fidelity calculators, I’d choose at least two programs. You can become proficient in both without a big time commitment. If you need a high-fidelity calculator, I would review the field of choices, then become expert with the one that makes most sense to you. After that, I’d choose a medium-fidelity calculator to rough-check results.
The process of retirement calculator aims to:
- Assess readiness-to-retire given a desired retirement age and lifestyle, i.e., whether one has enough money to retire
- Identify actions to improve readiness-to-retire
- Acquire financial planning knowledge
- Encourage saving practices
Note that very few retirement calculators attempt any sort of detailed tax computation. And that’s for the best, in my opinion. Usually they settle on prompting for a simple “tax rate.” In almost all cases, this means an effective tax rate, not a marginal rate. If you enter your marginal tax rate, you’ll probably grossly overestimate your tax liability.
Understand that retirement calculators aren’t giving you the answer to a simple mathematical equation. They are actually attempting to model the future. That’s a tough assignment. One that is actually impossible, in any precise sense. Its obvious that relying completely on any of these tools and then resting on your laurels is not at all recommended. Consult them, at least annually, to optimize your near-term financial decision making, while understanding that the future will inevitably turn out different than planned.
These are three of the best, so far according to the Forbes Magazine. Try them. Try more than one. But use them all with caution!
1. BlackRock CoRI
What it does: A relatively new entrant, the tool offered by the investment firm BlackRock BLK -0.40% uses current interest rates, inflation and other real-time data to come up with a daily index that, matched to your age and current retirement planbalance, projects a potential annual income.
The upside: No assumptions. This is real data and, thus, a more accurate view of things right now. That said, you have check back from time to time. The underlying indices change daily.
Watch out for: You have to be at least 55 to use the data and under 64, so this tool is really only accurate for “pre-retirees” of a certain age.
2. Vanguard Retirement Income Calculator
What it does: Measures a variety of inputs using sliders to generate a potential monthly retirement income target based on hypothetical investment returns. You can toggle on or off Social Security and pension incomes.
The upside: More granular than the BlackRock CoRI tool and useful for ages 21 all the way to 80. Nice visual targeting graph adjusts as you move the sliders back and forth.
Watch out for: Vanguard offers a list of planning caveats and warns that the tool is only a starting point.
3. MarketWatch Retirement Planner
What it does: Uses sliders, like the Vanguard tool, but you also can enter data such as home equity and taxable accounts. Graphs let you adjust assumptions to find a retirement age that can be sustained.
The upside: This tool is detailed enough to give you a full view of the likely outcomes of your planning while not drowning you in financial adviser-level detail.
Watch out for: Complexity. There are a lot of underlying assumptions which you can adjust. However, that also means you can adjust them to unrealistic levels.
Whichever tool you choose, remember to carefully reconsider your investment risk tolerance. As you near retirement, you lose time to recover from market losses, should they occur.
