Retirement Calculators

A retirement calculator is one of the most useful things you can use when planning your retirement savings. You see most people plan for retirement without any idea of how much they need to save, or how much they want in retirement. A retirement calculator provides the answers.

A retirement calculator shows you how much to need to save to get the income you need when you retire. Or it may be how much you want! That depends how much you are making, and how young you are. Either way do use a retirement calculator.

You can find a retirement calculator on many web sites, so you do not need to get the services or a retirement planner or investment advisor to find the answers. In this way, you use the retirement calculator, calculate the amounts you need, and then visit an investment advisor or retirement planner.

To decide how much you need to save, you need:

1. The income you need to live on at today's prices
2. The rate of inflation per annum between now and the retirement date.
3. The rate at which your fund will grow.

Let's go through these and how they relate to a retirement calculator. First, how much do you need to live on? Remember, that retired people do not normally spend as much as people who work. When you retire, you won't need:

special clothes for work the sort of car that keeps you up with the Joneses
you will be able to take holidays at off-peak times
and you will have time to do things - instead of paying to get them done.

So your costs will be lower. So let's say you are earning $60,000 a year now, you might think that $50,000 would be enough. Next you need to remember that if you are healthy, you expect to live for 15-20 years, and so need to allow for inflation in that period - so actually you need more! This is where a good retirement calculator comes in.

2. The next thing the retirement calculator needs is the rate of inflation, or what you expect it to average until you retire. With the price of oil going up, we know that inflation over the next decade will be higher than it is now. Official figures put inflation at around 2-3%, but the true figure is more like 5%.

This means that you need to allow for at least 5%, and probably 7% and feed that into the retirement calculator.

4. At what rate will your retirement plan grow? A difficult one this. Five years ago, people were talking in terms of 10%, but not now experts suggest a lower figure. The problem is that a retirement fund or retirement plan has to be prudent - you don't want to wake up one morning, a year or before you retire, to find that a crash on Wall Street has cut the value of your fund by 30%. You just won't have the time to get that money back.

So you will be doing well to get 10% return, but could almost guarantee 5-6%. Maybe 7-8% would be a realistic figure to put into the retirement calculator.

The retirement calculator is just some software set up to make a calculation after you enter some figures. As I said earlier, the retirement calculator needs:

Required income
Inflation
Expected return
And of course, how long till you retire.

Here are some results from a retirement calculator:

Required income: $30,000 per annum
Years till retirement: 15 years
Annual inflation: 2.5% (unrealistic)
Annual yield: 5%

Income needed in 15 years: $43,448
Required value of retirement plan in 15 years: $825,000

Quite a lot of money for a modest retirement income. Here's another one:

Required income: $30,000 per annum
Years till retirement: 20 years
Annual inflation: 5%
Annual yield: 8%

Required value of retirement plan in 20 years: $987,573

If you want an income of $45,000 when you retire - equivalent to less than $30,000 today - you will need: $148,000.

When you use a retirement calculator, make sure you use one that does calculate the income you will get at retirement adjusted for inflation - over 20 years, you will need 50% more than think you need today. If you do this, then you will benefit form using a retirement calculator.