After my post on retirement yesterday, I got a little more interested in the subject, and did a bit of research on how you could plan your retirement. This is the first time I have thought about the subject, and I think age is a large part of that.
To me, the first thing to do when thinking about retirement income planning is to figure out how much you will need, and where you stand today.
I think a very good way to do that is to use a retirement planning calculator. A retirement planning calculator allows you to enter in some numbers about your retirement goals, your current financial condition, expected retirement income as well as expenses, and then shows you when you could retire, based on how things stand today.
You will need to play around with this a little bit, and be modest and honest in your assumptions to come up with fair results. If you say that your investments will return 14%, and that you only need half of what you live on today to come up with a number, it will be really fallacious. Be honest with your assumptions, even if you don’t like what you see.
Keep in mind that most retirement planning calculators don’t account for big ticket expenses like buying a house in their calculation. This is a crucial point because you are probably going to incur a few of these big expenses in your lifetime.
The other thing about these calculations is your projection of how much you will need in the future. I thought of my current expenses, split them up into needs and wants, and that gave me a good perspective on how much I will really need in the future. It is reasonable to assume that I really can’t cut down on all my wants because that’s just the way I have lived a large part of my life, so be realistic in your assumptions there too.
Splitting expenses like this also helps you to focus and come up with a more honest number. You can’t just wish your needs away. Saying that you will just need 70% of your current income in retirement is akin to saying that about 30% of your current expenses are on wants. And this doesn’t even account for the fact that you are likely to incur higher medical costs later in life.
One last thing to note about a retirement planning calculator is that it’s too easy to change a number, and come up with something that is easier to digest, even if it is a bit far off from the reality.
With these things in mind, let me list out a couple of retirement planning calculators I liked among the 17,000 or so that are there online:
MSN Retirement Planner Calculator: This is the simplest to use, refreshes when you change a number so it’s easy to try out many variations. It doesn’t show you calculations on how your income is expected to grow over the years, and will probably look a little simplistic to someone who wants to make projections on how their salary will grow over the years, or someone who is early on in their career. Nevertheless, it is a simple and useful calculator to build quick projections with different variations.
Bloomberg Retirement Planner Calculator: I liked this one the best, but it takes a little bit of time to figure this retirement planning calculator out. There were a couple of things that threw me off initially.
The first was the input field: “Percent of income at retirement”. This is the field where you input what percentage of today’s salary you expect to spend in retirement. So, if you save 20% of your income today, you can input 80% in there.
The next thing that took me a bit of time to figure out was the text in the result of the calculator, which says: “last year’s income”. In my mind I was thinking about last year’s income, but this is your last working year’s income. So, if you said you will work 60 years, and you will get a raise of 4% every year, this will calculate what you earn at 60 years at a 4% CAGR from today. These things may not confuse you, but took me a bit of time to figure out, so I thought I’d list them out here.
A retirement planning calculator is just a tool that does math for you. There is a lot of hard work and discipline that will go to many any of these numbers come true. It is a good place to start, but realistically is not much more than that.