Retirement Calculators: What You Should Look For
Most people realize they need to save for retirement, but aren’t sure how much money they should set aside each month. A recent study from Prudential Financial Inc. found 70% of Americans are worried they haven’t saved enough and fear they will need to work during the first ten years of retirement.
Some people don’t save enough because they have difficulty budgeting properly, while others don’t even know how much they need to save in the first place. Fortunately, there are a number of great retirement calculators that can help. You can use these tools to quickly estimate the amount of money you’ll need to set aside each month.
Key criteria for a retirement calculator
There are a number of factors you need to take into consideration when saving for retirement, such as the rate of return on your investments, taxes, Social Security earnings and future expenses. Performing these calculations on your own would be very time-consuming and tedious. It is also very easy to make mistakes.
It is much better to use a retirement calculator instead. A number of financial companies have developed free calculators for you use. However, some of them are much more accurate than others. Here are some key features you should look for.
Uses a Monte Carlo Simulation
The rate of return on your investments will affect your retirement goals. Retirement calculators typically ask people what ROI they expect to receive from their portfolio. Unfortunately, very few people can realistically predict the performance of their portfolios. Rob Arnott, the manager of the PIMCO All Asset fund, said most investors still expect a 10% ROI from equities, even though returns have declined considerably in recent years.
Most retirement calculators simply give you the average rate of return every year. Unfortunately this isn’t terribly realistic. A better option is a retirement calculator that uses a Monte Carlo simulation to estimate future returns on your investments. The advantage of these simulators is they run hundreds or even thousands of possible market scenarios on your portfolio and give you are a range of possible outcomes. Some retirement calculators also allow you to factor in the risk you are willing to take to generate your rate of return.
Typically the calculator will then tell you the likelihood that your plan works. Keep in mind you want to create a plan that works at least 70% of the time. If it succeeds every time, you are probably being too conservative, but if it only works 50% of the time, you are putting your future in the hands of a coin flip.
Takes Taxes into Account
For money in taxable accounts you will pay taxes on your investment income each year. You will also continue paying taxes after you retire. Fortunately, there are a couple of reasons your taxes will probably be lower:
- You will probably be living off of a smaller income, which means you should be in a lower tax bracket.
- You will receive a higher standard deduction after you turn 65. This deduction will increase by $1,550 for singles and $1,200 for married couples.
- Your Social Security benefits may not taxable.
You also need to take into account taxes on distributions from retirement accounts and ensure you take the required minimum distributions once you turn 70 1/2. You should use a retirement calculator that takes taxes into account.
Estimates Social Security Benefits
Social Security benefits are an important stream of income for most retirees. One study found that more than two-thirds of seniors receive over half of their income from their Social Security.
You need to accurately estimate your future Social Security income when planning for retirement. The Social Security website has its own calculator to estimate future benefits. However, it is much easier to use a retirement calculator that handles this for you.
Factors for Other Assets
Some people own tangible assets they plan to sell to help pay for their retirement. For example, many people purchase large homes while raising their families, but plan to downsize after they retire. You should look for a retirement calculator that lets you count the equity in your home as well as other non-investment assets.
Changes to Lifestyle
Some retirement calculators use your current expenditures as a baseline for future expenses. These calculators are not always helpful, because everyone’s situation will be different. A good starting point is 80% of current income, but forming your own budget will lead to a more accurate result. Here are some questions you need to answer to predict your future expenses:
- Do you believe your mortgage will be paid off?
- Do you plan to travel?
- Do you intend to relocate to another city with a different cost of living?
- Do you plan on supporting your children or other dependents during part of your retirement years?
- Do you expect to develop any health problems?
Unfortunately, estimating your future expenditures isn’t an exact science. A retirement calculator can’t calculate these expenses for you, but it can help you estimate the money you need to save once you’ve figured this out.
Choose the Right Retirement Calculator
One of the biggest financial mistakes people make is failing to save enough money for retirement. Some people make this mistake because they fail to budget properly. However, most people simply don’t know how much money they need.
A retirement calculator can help you figure this out. There are many of them online, but some are much more accurate than others. Find one that:
- Uses Monte Carlo simulation
- Takes taxes into account
- Includes social security
- Factors in other assets
- Allows you to customize your spending
This article was syndicated from Business 2 Community: Retirement Calculators: What You Should Look For
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