We assume you want to know how much to save for retirement and how to invest. Calculators generally do a good job of telling people with uncomplicated financial lives how much to save, but asset allocation – or what to invest in – is usually beyond their scope. For many people, investing in a low cost lifecycle or target date fund is fine. Look for one with an expense ratio of 0.15 percent or less.
However, if you have complicated finances or want one-on-one advice, consider using a professional advisor or even a robo-advisor. Only deal with an advisor who adheres to the fiduciary standard. Interview several, as you would a job candidate, and have your interview questions thought out in advance.
Below are a few guidelines we recommend to find a quality calculator:
- It should only take a few minutes to use. The projections will be ballpark due to investment and earnings uncertainty.
- It should allow you to vary your planned age of retirement, assumed investment return, and target replacement rate. The calculator may tell you that you need to save an impossibly large share of your income to reach your target at your desired retirement age. A good calculator allows you to experiment with trade-offs between working longer, saving more now, and having a lower standard of living in retirement.
- It should not encourage cheating by assuming an unrealistically high rate of return and be realistic about how long you can work.
- It should suggest a savings rate and asset allocation and emphasize the importance of investing in low-fee funds.
- It should not be sponsored by a financial institution. You run the risk of falling for a sales pitch for high-cost, actively managed funds, or worse.
- It should allow you to postpone claiming Social Security till after your planned retirement age, drawing down your financial assets in the meantime. Drawing on your IRA or 401(k) first, BEFORE you collect Social Security increases the floor below which your income can never fall, however long you live or badly your investments perform.
- It should not assume that you are going to downsize your home. Most people want to age in place.
- It should report all numbers at today’s prices.
Here are some recommended calculators:
Center for Retirement Research at Boston College (CRR)
This calculator should take about a minute. The target retirement income is pre-determined, based on your current income, so it doesn’t allow you to choose a lower target, which might make sense if you are falling far short. It does a nice job of illustrating the trade-off between working longer and saving more. It doesn’t address delayed claiming of Social Security, asset allocation, or fees. The calculator doesn’t mention or target financial wealth – everything is in terms of post-retirement consumption. This may seem odd, but the purpose of retirement saving is not to accumulate wealth, but to finance post-retirement consumption. As such, expressing outcomes in terms of consumption is a better approach.
This calculator took us about two minutes. It calculates everything in nominal dollars, not in today’s prices. As a result, the calculator produces numbers that are scary and hard to interpret. We recommend setting inflation to zero and making rate of return assumptions in real terms. It is not suitable for people expecting to receive income from a defined benefit pension plan. It understates projected Social Security incomes of two-earner couples. A nice feature is that allows users to choose their target replacement rate. As with the CRR calculator, it doesn’t address delayed claiming of Social Security, asset allocation, or fees.
This is identical to the AARP calculator, with the same strengths and weaknesses. The website contains other calculators tailored to specific questions.
This calculator gathers more detailed information and therefore takes considerably longer to use – perhaps 15 minutes. The free version allows users to postpone claiming Social Security, to input projected income from defined benefit pensions, and reports all numbers in 2018 dollars. It contains useful articles on financial planning for retirement. A limitation of the calculator is that it only calculates financial preparedness given your inputs – if you want to figure out how much to save or how long to work to hit a given target, you have to do so by modifying your inputs by trial and error.
It is a great calculator for those willing to invest the time or who are looking for more in-depth answers. New Retirement plans to launch a subscription version incorporating asset allocation and fees shortly. Users of both the free and subscription versions have the option of requesting the assistance of a flat-fee advisor pledged to uphold the fiduciary standard. We haven’t tested the quality of the advice and repeat our recommendation to interview several candidates.