Retirement (noun) – The period of one’s life after leaving one’s job and ceasing to work.
How to use Retirement Calculator
This calculator takes into account your current age, savings till date and current salary along with certain economic and personal assumptions to calculate how much you should save each year, starting this year until you retire, to enable you to maintain your desired standard of living during retirement. You can change the assumptions to determine if your savings can weather high inflation, poor investment returns, higher tax rates and expenses during retirement and a longer retirement life. It is expected that you do this planning exercise annually to make appropriate course corrections to achieve the desired results.
Enter the following information in the retirement calculator:
Just the facts
- Your age (years) – How old are you? This is probably the most important factor that determines how much you save. The magical combination of beginning to save early plus compound interest on your savings is the key to a comfortable retirement.
- Annual income (dollars) – How much do you earn every year? This information, along with inflation rate, is used to predict how much you are likely to earn in future and what percentage of your current salary you should save annually beginning this year.
- Savings till date (dollars) – How much have you saved? Starting late without any savings is an uphill battle.
‘What if’ factors
- Retirement age (years) – When do you plan to retire? This determines how much time you spend in retirement. It is assumed that you withdraw from your savings starting from that age onwards.
- Savings rate (percentage of your pre-retirement annual income) – Your savings rate during your working years, starting this year
- Rate of return before retirement (percentage of your savings) – A reasonable rate of return you expect to achieve on your investments during your working years, starting this year
- Retirement Income (percentage of pre-retirement annual income) – Your expected lifestyle during retirement
- Rate of return during retirement (percentage of your savings) – A reasonable rate of return you expect to achieve on your investments during your retirement years
While the facts cannot be altered, you can continuously adjust the ‘what if’ factors to run various ‘what if’ scenarios to determine under what circumstances you can achieve the desired retirement lifestyle and income. The following charts show useful information regarding your retirement scenario:
- A bar chart depicting the projected retirement need vs. accumulated savings along with either shortfall or excess amount (dollars).
- An area chart showing accumulated savings by age
- A bar chart showing the annual income by age
How much should you save?
As a thumb rule, you should save enough money that will cover at least 30 years of your retirement life. i.e., Your nest egg = 30 years x Your yearly cost of living expense during retirement. Another rule of thumb says that you will need 70 – 80% of your pre-retirement annual salary to live comfortably during retirement. It doesn’t hurt to save more to factor in the unknowns and be prepared to absorb risks including poor investment returns, inflation, tax law changes, high long term care costs and the possibility that you will outlive your savings.
If there’s shortfall in savings, you can take the following actions to achieve necessary savings:
- Save more before retirement – Explore if you can save more without altering your lifestyle a lot during your working years.
- Spend less during retirement – Explore if you can manage to lead a comfortable retired life with less income.
- Retire later – If you postpone your retirement, you automatically save more towards your nest egg and spend less time in retirement.
Here are some key assumptions used for the calculations:
- Average inflation rate is assumed to be recent historical average of 3%.
- All income, savings and earnings are pre-tax amounts and are taxed only during withdrawal.
Before Retirement / Working Years
- All savings are made at the end of the year.
- Your annual income will increase or decrease at the rate of inflation.
- All withdrawals are made at the beginning of the year.
- Your annual income (i.e., withdrawals) needs to keep pace with inflation.
- Social Security, pension, annuity and other extra income are NOT taken into account for above calculations. If you want to factor in those as well, then you can reduce the retirement income derived from your savings.
- Life expectancy is assumed to be 90 years for calculating retirement income needs. As per SSA actuarial life table, 75% of all men and women in the US would be dead by the age of 90.