I ended my prior post, Saving for Retirement: Are You as Clueless as Your Fellow Americans?, by recommending that you use an online retirement calculator to estimate how much money you need to retire and how much you should be saving for retirement. Let's continue the conversation by discussing what to look for when selecting a retirement calculator. Future posts will give you tips for using them to obtain the best results for you.
As you can imagine, there are all kinds of retirement calculators out there. Some are available to the general public and can be found on the websites of nonprofit financial education institutions, online financial magazines or some financial institutions. Some are available only if you're invested with a particular financial institution or are accessible through your employer or 401(k) plan. And some you must purchase.
Most retirement calculators use The Magic Formula for Retirement Security (Income > Expenses) as the basis for their calculations. They estimate your retirement income from all sources, compare the results to your projected expenses, estimate a shortfall between your income and expenses, and figure out how much you need to save to make up for the shortfall. The more sophisticated calculators can also help you decide how much you can withdraw each year from your retirement savings, and how you might allocate your assets among different types of investments.
Here are some features I like to see in an online retirement calculator:
- The ability to input your expected expenses in retirement for various types of expenditures, instead of using simple rules of thumb for target retirement incomes. I'd rather you get prompted to remember all the things you might spend money on and take into account your specific spending needs.
- The ability to vary how much you'll withdraw from savings, so you can see the effect of reducing or increasing your withdrawals.
- Storing your answers and results. Not only will this save you a lot of time when you revisit the calculator, but it helps you compare current and prior projections.
- The ability to vary the future economic scenarios. You'll want to see what might happen if we get hit again with a downturn.
- Output that shows the component income sources--Social Security, draw from retirement savings and, if applicable, pensions and work. It's important to understand how the different pieces add up to your total income, to help you assess the quality of each income source.
- "What if" features. For example, what if you work for a specified period in your retirement years, what if you sell your house and invest the proceeds, what if you reduce your living expenses, what if you delay retirement, what if you live longer than expected, what if you have high long-term care expenses, what if you change your allocation between different types of investments, what if you delay taking Social Security benefits, and so on.
One of the most detailed online planners I've seen, available for purchase at www.RetirementWorks2.com, is called RW2 for YOU (a one-year license costs $189, but discounts are available). In particular, I like that it projects your results using alternative future scenarios, helping you understand how to withstand the risks of different possible economic and life events. It also provides a detailed action plan. Another calculator called AgeBander allows you to project how your living expenses may change as you age, and uses a sophisticated method of allocating your assets in retirement to avoid panicking during downturns.
What do actuaries think about retirement calculators? The Society of Actuaries recently sponsored a report titled Retirement Planning Software and Post-Retirement Risks which analyzes 12 online retirement calculators, discusses their strengths and weaknesses, and provides tips on how to use them to best plan for retirement.
Using retirement calculators may sound like a lot of work, but it sure beats being wrong and going broke at age 80! And it's really not that much time, given the importance--securing a reliable source of lifetime income in your retirement years.
As I explained, this post isn't intended to provide an exhaustive review of retirement calculators. If you have a favorite retirement calculator, please help our readers by writing a comment below that includes the name of your favorite calculator and the reasons you like it.