A good retirement calculator could help you determine how much you need to save for when you retire. If you've done a poor job of saving money, you could find yourself without sufficient funds to live on in your older years after you stop working. This could be especially disastrous if you're forced into retirement because of an illness or disability. A retirement calculator can be a useful tool for making sure your financial situation is sound at that point in life.
You should gather all of your financial data. Then add up all of your financial liabilities. This will include ordinary expenses but will also include expenses you might not normally pay for every month, like insurance if you pay quarterly or annually. The resulting figure represents the total amount you need every year to meet your financial obligations. This figure is the starting point.
Find a good financial calculator online (see Resource) and follow the instructions. An example would be the calculator hosted by CNN Money or some other reputable website or financial firm. You do not have to buy products from the company that hosts the calculator.
The retirement calculator gives you an outline to work from. The calculator will help you quantify your needs in terms of dollars and cents. You'll have an idea of what you need to save on a monthly basis based on an investment rate of return that you choose.
The calculator will also ask you what you think inflation will be going forward. Inflation is the rate at which the money supply expands due to the Federal Reserve's monetary policy, causing the prices of goods and services to increase. This price increase is what you must account for if you hope to maintain your standard of living when you retire.
A retirement calculator is a guide, but it cannot predict the future. Some things are simply not possible to predict with absolute accuracy. You won't know the exact inflation rate in the future, nor is it likely that you'll know what your actual rate of return on investments will be for the next 30 years. You should understand that even if you use a retirement calculator, you may end up far short of where you think you need to be financially at retirement.
The more you understand your investments, the less risk you'll take in putting money in them. With enough knowledge and experience, you may become very good at predicting investment returns. Lacking this, you may need to rely on fixed-interest returns so you can create a predictable future income for yourself. In the end, retirement calculators are only as good as the numbers you input into the software. The reliability of the calculator to predict your future financial needs increases when you remove variables and provide fixed or known percentages instead.
- "Ernst & Young's Personal Financial Planning Guide, 5th Edition"; Martin Nissenbaum, Barbara J. Raasch, Charles L. Ratner; 2004
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A. Crane; 2007
- "Life Insurance"; Kenneth Black Jr., Harold D. Skipper Jr.; 1994
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