Using a Retirement Calculator

Retirement calculators are a great tool for calculating a retirement savings plan but like most calculators you need to know how to use them. Independent financial advisors are often asked to do calculations for retirement savings plans but a big part of the job is not using the calculator but determining the appropriate inputs and interpreting the results. Here are some things to consider when using a retirement savings calculator:

The target savings should be a range - There is no "right" amount to save. For most people putting money away for retirement is a financial stretch so some months you won't be able to save as much as other months. That's OK as long as you try to save more when you have the ability to do so.

More is good - Because we can't predict investment returns or inflation with any certainty it's impossible to predict the exact amount of savings you'll have when you retire. One thing we do know is that when you retire you'd rather have too much money than too little so saving a bit more every month than your retirement calculator suggests is a good way to increase the odds that you'll have more savings than you need later.

The younger you are the less accurate the numbers - The further you are from retirement the more chance there is for things to change in your life that may impact your retirement calculations. This is not the fault of the retirement calculator but rather human nature as most young workers underestimate the increase in both their income and expenses during their lives. Your expectations and what you consider to be a good income for retirement is likely to change as you get older.

Planning is an ongoing process - Using a simple retirement calculator for your planning is fine but don't assume the numbers that are generated are going to be good from now until you are ready to retire. Retirement savings plans should be revisited frequently to update your progress and adjust for any changes in your income and/or expectations. If you are getting off track in your savings and/or investing it's important to make adjustments as early as you can.

Your house is not a retirement plan - When you calculate a retirement savings plan do not treat the equity in your house as part of the plan. You'll always need a place to live and even if you downgrade to cheaper housing at retirement you'll seldom net as much equity as you think. Consider equity in a house to be a potential means of lowering your housing expenses in retirement, not a way of putting food on the table. You'll need cash for that.

Don't underestimate how long you'll live - The two most powerful inputs to a retirement savings calculator are when you'll retire and how long you'll live. It's tempting to make the numbers work by assuming you'll only live to be 80. The reality is that if you make it to retirement your life expectancy will be well into the 80s and beyond. Life expectancy continues to improve so most professional planners consider 95 to be a realistic live to date for retirement calculations.

When using a retirement savings calculator be sure to give a reasonable amount of thought to your inputs and revisit your assumptions periodically to make sure they are still appropriate. This will help you make the necessary adjustments and keep your retirement plan on track as you navigate through life's changes.