If you’re planning for retirement, there are some basic tools online that you can use to make sure you’re saving enough money to have enough income to last you into your retirement. A simple retirement calculator can tell you how much money you need to save every month assuming an average interest rate and a expected inflation rateThis is after a fixed Number of Years, assuming that, to achieve a desired retirement income. There are plenty of such calulators on the web and this article will help you navigate through the most common.
Annual Retirement Income
On most calculators, the Annual Retirement Income is what you’ll need for all your living expenses, plus medical bills, expected nursing care and/or any other costs associated with old age. Be sure to generously estimate this amount; medical expenses can vary widely, and it is unlikely you will know the full cost of your medical care until you actually reach the age at which it’s needed (by which time medical costs are sure to have risen). The Inflation Rate to use is typically the percentage of annual inflation as defined by the Consumer Price Index.
Contributions and Returns
Next, there is usually either an Annual Contribution or Percentage of Income Saved. This is how much you’ll contribute every year to your retirement account. In the case of an annual contribution, this can be a monthly amount multiplied by 12, or it could be a lump sum that you save up over the course of a year, depending on how you plan to handle your account. In the case of Percentage of Income Saved, this is the percentage of your annual income that you contribute to this account.
The Annual Yield, or Investment Return, is how much your bank or other financial institution will pay you in interest, or the percentage gain you can expect from your investment, on an annual basis. Generally speaking, this is less than 10 percent and it is very subjective to the risk level you will assume over the investment years. A more aggressive investor might expect to earn 10% on average.
Reaching Your Goals…
Finally, by inputting all this information, you can see if the amount you’re contributing will be enough to produce your desired Annual Retirement Income.
If the numbers don’t work out, there are certain adjustments you can make, to try and tinker with the results. Some numbers adjust more easily than others. For instance, you probably can’t play around too much with the Number of Years. You could try to see what things will look like if you retire slightly early, at age 60 or 62, or you could try to see what happens if you enter data for a later retirement, at age 67 or 70, but generally speaking, you can’t really adjust the Number of Years by too much (most people use age 65 for their calculations).
The Inflation Rate will vary, but probably not by too much. Historically, the inflation rate has hovered somewhere between zero percent and 10 percent for the last 100 years, with an average of just over three percent for the entire period.
The Annual Yield, or Investment Return, also won’t change that much, as it’s tied to your financial institution and their returns, but unless you have a miracle fund you’re invested in, you can’t really expect more than a 10 percent yield.
In the end, what you’re left with as the most variable factor usually is the Annual Contribution or Percentage of Income Saved — this will primarily determine your Annual Retirement Income. Some people may end up having to contribute vastly more to their retirement account every year to achieve their goal.
It’s best to use the simple retirement calculator as early in your life as possible, so you can know what kinds of financial goals you’ll need to set in order to provide yourself with the money you’ll need later in life. It’s never too early to start retirement planning, so be sure to calculate the numbers that are relevant to you, and set your goals appropriately.