Most retirement calculators work in a similar fashion. You go onto a financial services site; your 401(k) provider, brokerage, bank or even AARP and enter information:
- your date of birth or age and perhaps your name
- when you would like to retire, either a year or an age (Some plans will automatically use 65)
- Your current income
- The income you will have in retirement– Enter all income sources expected in retirement, including rental income, social security and pensions. Make sure you have already visited http://www.ssa.gov to get an estimate of your social security income.
- Enter the assets you will be using in retirement– Examples would be your 401(k) from work, IRAs, stock, bank and brokerage accounts.
- How those funds are invested – in broad brush strokes such as percentage stocks, bonds and cash.
- Lastly is your mortality age – how long do you want the money to last? Which is generally your death, euphemistically called “end of plan.”
Next you will click on the button at the bottom that says “Calculate” or something similar.
The output, depending on the plan, will give you red light (you need to make changes), amber (consider tweaking some things) or green (good to go with the current plan. It may also give you a percentage of success for reaching your goal.
Here are the things you can change:
- How much you save
- How you invest those retirement savings
- When you will be retiring
- How much you will be spending in retirement
- Your mortality age (make sure you run out of time rather than money)
Most plans build in an inflation rate of 4-5%, which you can also tweak. They use Monte Carlo Simulation to back test how well your current portfolio would have done in the last 90 years of investing.
It is good to run a retirement calculator annually, and more often if you are close to retirement aka financial independence. It is even better if you try three to confirm the results.
We wish you a happy, healthy and wealthy retirement!