If you want to be serious about retirement, you’ve got to crunch some numbers. Otherwise, you can’t really tell amidst the ups and downs of the economy and the market whether you’re on track toward an acceptable post-career lifestyle. These five tools, all free, can help improve your planning and your prospects. You’ll find links to all five in RDR’s Retirement Toolbox.
1. Retirement Income Calculator This T. Rowe Price tool allows you to provide detailed information about your finances—how your savings are invested, pension and Social Security payments, income from part-time work, if any, etc.—so you can come away with a nuanced sense of your retirement readiness. Once you know where you stand, you can then run alternative scenarios to see how you might improve your prospects. If you’ve already retired, this tool will help you determine whether your current level of spending is sustainable throughout retirement or whether you need to tighten your belt.
Rather than estimating the size nest egg you’ll need in retirement as many calculators do, this tool focuses on sustainable income. Specifically, you enter the amount of income you expect you’ll need in retirement (say, 80% of pre-retirement salary) and the tool uses Monte Carlo simulations to estimate the likelihood that the resources you’re projected to accumulate (or have already accumulated if you’re retired) will generate sufficient income throughout retirement. Generally, you want to see a success rate of at least 80%. If you fall short of that level, you can see how changing different aspects of your finances—saving more, spending less, cutting investment fees, etc.—might improve your chances of success. Revving up this calculator every year or so and making small tweaks as needed can prevent you from falling behind in your planning and help you avoid having to make dramatic and painful adjustments to your lifestyle later in life.
2. Risk Questionnaire—Allocation Tool One of the most important aspects of setting an investing strategy is choosing a stocks-bonds mix that jibes with your appetite for risk. Invest too aggressively, and you may end up selling stocks in a panic when the market dives. Invest too conservatively, and you may not earn the returns you need to achieve your goals. This questionnaire from Vanguard can guide you to an appropriate stocks-bonds allocation. Just answer 11 questions designed to probe, among other things, your investing habits and how you might react to major market setbacks, and you’ll receive a suggested mix of stocks and bonds (and, in some cases, cash). Click on the “other allocations link,” and you’ll get stats showing how your recommended portfolio as well as ones more aggressive and conservative have performed on average and in good and bad markets since 1926.
3. Retirement Income Planner (and Retirement Budget Worksheet) Estimating that you’ll need 80% or so your pre-retirement income after you retire may be okay for establishing a savings target during your career. But once you’re within 10 or so years of retiring, you want to get a better handle on what your actual retirement expenses might be. This interactive retirement budget sheet, which you’ll find within Fidelity’s Retirement Income Planner tool, will help you do just that. It not only has slots for 49 different expense items, ranging from cable and internet fees to health care and travel; it also allows you to check a box next to each expense designating whether it’s essential. The tool then provides a tally of all your expenses, plus a breakdown of essential vs discretionary ones. This can give you a sense of how much wiggle room you have to pare expenses if necessary, plus show you which areas are prime candidates for cuts. Of course, no level of detail will be able to sure 100% accuracy. But that’s not the goal. The point is to make the best estimate you can and then refine your budget (and your actual spending) as needed as you go along.
4. Financial Engines’ Social Security Calculator One of the single most important decisions retirees face is when to claim Social Security. Unfortunately, many retirees don’t give this issue the serious thought it deserves, and just take benefits as soon as they can (age 62) or soon thereafter. That can be a costly mistake. Each year you postpone benefits between age 62 and 70, your payment increases about 7% to 8%, dramatically boosting the amount you may collect during your lifetime. By taking advantage of a number of different claiming strategies, married couples may be able to boost their potential lifetime benefit several hundred thousand dollars.
Which is why in the years leading up to retirement, it’s a good idea to check out Financial Engines’ Social Security calculator. You just enter such information as your age, current income, the age at which you expect to begin collecting Social Security. The tool will then estimate the amount you’ll collect in today’s dollars over your lifetime if you claim benefits as planned—and show how much more you might collect by claiming at a different age. If you’re married, the tool will show how you and your spouse might maximize lifetime benefits by better coordinating when each of you claims. Another nifty feature: you can see how the projections changed depending on whether your life expectancy exceeds or falls short of average.
While this tool is a good way to start thinking about how and when you might claim Social Security benefits, the amount of money at stake is large enough that you may want to hire an adviser to help you with this decision or go to a Social Security claiming service, such as Maximize My Social Security or Social Security Solutions, that, for a fee, will help you devise a strategy.
5. Will You Have Enough To Retire? I know that no matter what I or anyone else says, some people simply aren’t going to spend more than a minute with any tool. If you’re one of those people—or you just want a quick update to see if you’re on the path to a secure retirement—this tool is for you.
Just enter your age, the age you expect to exit your job, the amount, if any, you have saved so far, the percentage of income you’re saving each year and the tool will immediately estimate the amount you’ll need at retirement and the amount you’re projected to have. At a glance, you can quickly see whether you’re likely to have an adequate nest egg if you continue on your current path. If it appears you’re falling short, you can see how your chances improve by, say, saving a higher percentage of pay or delaying retirement a few years (or both). My only gripe about this tool: I wish it couched its estimates in sustainable annual income in retirement rather than giving you your retirement “number.”
Are there other worthwhile free tools that can help you better plan for retirement? Sure, you’ll find at least a dozen more listed in RDR’s Retirement Toolbox, including one that will show you how much guaranteed lifetime income a specific sum of savings might generate, another that can help you decide between a traditional and Roth IRA and one that can help you compare the cost of living in different cities.
But to create an overall retirement strategy and monitor it to make sure you stay on track, you can start with these five.
Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at firstname.lastname@example.org.
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