Planning for retirement is often a source of confusion and frustration. Knowing how to save money for the future, where to save it, and researching available retirement plans is a complex world full of concerns about taxes, penalties, rates of return, and limits. Although the best way to create a workable retirement plan is to speak to a financial professional, many people can get a good idea of what’s in store for them by using a retirement savings calculator.
What is a Retirement Savings Calculator?
There are many retirement savings calculators on the Web. These are simple online tools where the user enters information about their income, their retirement goals, and their current assets to come up with an estimate of the future value of any retirement savings set aside. One of the best is provided by the financial news media outlet Kiplinger.
Before using any retirement savings calculator tool, it is critical that you understand what it is you’re after, and what will be asked of you. In other words, people have different goals when thinking about retirement. Some just want to live comfortable, secure lives. Others have grand plans with dreams of expensive toys and travel. Each person will have to put aside different amounts of retirement money to achieve those goals. For the calculator tool, many versions walk users through the questions, including where to find the information needed to calculate your result.
It is important to understand that most online retirement savings calculators do NOT take into account any federal taxes. Actual spendable income may be less than what the calculator estimates because of the potential for future taxes on assets.
How Much Income Will You Need When You Retire?
The first thing that most retirement savings calculators will use to determine your future needs is your current gross income. The calculator will also generally ask the user what percentage of income they wish to replace during retirement. Financial experts usually estimate about 80% of current income is a good goal to shoot for. If you plan to pay for your own health insurance after you retire, you may consider setting a higher percentage in the tool. Because a spouse can impact the amount of income and the needed retirement savings, most tools give users the option of including income information from a spouse to help make the calculator more accurate.
Social Security and Pension Income
Federal retirement programs like that managed by the Social Security Administration (SSA) play into future retirement savings. Employer or government pensions are also taken into account by most savings calculators. Social Security often provides an annual statement that shows what amount of income you can expect when you retire; the SSA website also has its own benefits calculator online.
Pensions sometimes come with cost of living adjustments, particularly those distributed by government agencies. Pension plans from private-sector employers generally do not, but there are exceptions.
Many of us have gotten a jump on retirement savings even before using an online calculator. Employer-matched 401(k) programs, IRAs, money market accounts, and stock investments may already be accruing interest. The calculator usually asks for the current value of the assets held by the user. It may also ask the user to estimate annual returns on investment. In general, 6% average return is a conservative figure, while 10% would be considered aggressive. Evaluate the assets you already own to determine which return percentage is right for your situation.
Home Ownership and Home Equity
Once we retire, many people in the U.S. plan to sell their primary homes and move somewhere else. Whether that is a retirement community on the Florida coast or some other far-flung destination, selling a home is often a step many financial professionals recommend for retirees. There are tax advantages to selling a primary residence.
Online savings calculators typically have fields to input current market value of the home you live in. They may also ask what dollar amount of the mortgage you currently hold will remain at retirement. Some of the best online calculators, such as the one provided by Kiplinger, may even allow you to input the amount of cash you expect to use from selling your primary residence to buy a new house somewhere else.
While we’d all love to live to a ripe old age, this may not be possible for many Americans. Guessing on the number of years one expects to live after retirement is a gamble; yet most online calculators ask users to do exactly that kind of guesswork. Many financial professionals ask their clients to assume that they will live at least until the age of 90 to hedge any bets.
The Kiplinger calculator asks users to input how much of their portfolios are tied up in stocks during retirement. Inheritances, sale of property such as business, real estate, or collectibles may also be added to the calculator if it asks for the dollar value of additional assets.
Once all is said and done, users of these online tools will have a good baseline understanding of the amount of retirement income they can expect and how much more they may need to save each month while they continue to draw a paycheck. As with any investment, speaking to a financial professional such as a retirement planner can help you get the most from your retirement savings plans. Avoiding excessive taxes and maximizing the value of your assets will take you a long way toward a comfortable, financially secure retirement.