Friday, August 5, 2011

Day 295 - Retirement Calculator Comparisons

photostock /
How much should I save for retirement? I would bet the farm that this is a very common question. I've been seriously thinking about upping my retirement contribution once we finish paying off the $60K Project, but figuring out an estimate of how much money I will need at retirement is proving more difficult than I expected. How much money will I need for expenses during retirement? More or less than when I was working? I guess it depends on what I intend to do in my golden years - maybe skydiving as the couple in the photo appears to be doing (although I'm beginning to wonder. I'll leave the conclusion up to your own devices).

I decided to Google "retirement calculator" and see what types of options are out there to help me with this task. But how do I know how reliable an online retirement calculator can be? Considering there are so many variables that go into the calculation, I'm not really even sure what I should consider a "good" calculator.

So I decided to do a test - put the exact same information into multiple online retirement calculators and see how similar (or different) the results are. I am hoping that somehow comparing the results of multiple calculators will help me assess which ones are actually good enough to rely on when it comes to figuring out how much I need to be saving for retirement. Note that the inputs I use are as close as possible to my (including Mike) real life financial situation but some amounts I decided on are completely arbitrary. I also tried to be relatively conservative with returns in an attempt not to overestimate. And what the heck, why not retire at age 60???

In order to be consistent, I attempted to use the following inputs in all of the calculators:
Retirement Age: 60
Life span: 85 years
Current retirement savings: $95,000 401(k), $5,000 Roth IRA
Annual 401(k) contribution (today's $$$): $20,000
Annual Roth contribution: 5,000
Annual inflation: 3%
Average annual raise: 4%
Average annual investment return: 7%
Include Social Security benefits? Yes Benefits starting at age 65
Annual retirement spending estimate: 75% of current year income adjusted for inflation
Tax rates (if asked): Federal 25%, State 6%
Post-retirement investment return: 4%
Annual savings increase: 1%

I tested five different calculators which produced the following results. The columns below show 1) the company that offers the calculator, 2) total amount of money saved at age 60, 3) total amount of money required to retire without a shortfall, and 4) shortfall or overage. 

Calculator Amount Saved at 60 Total Amount Required (Shortfall)/Overage
Schwab*  $3,371,600  $5,985,700  $(2,614,100)
CNN Money*  70% chance  $4,926,231  ???
T. Rowe Price*  $8,354  $10,375  $(2,021)
MSN Money**  $2,665,411  ????  ???
AARP**  $3,751,925  $3,537,592  $214,333

* Amounts account for time value of money and are stated in future dollars
** Amounts are stated in current year dollars (I think??)

My conclusion
WHAT THE HELL? Of the two calculators that actually gave me an amount needed vs. actual amount saved at age 60, one says I am short $2.6 million and the other says I am over by $214K. MSN Money, from what I could tell, didn't tell me the total amount required - only the amount I would have at age 60. CNN Money tells me I have a 70% chance of actually acquiring $4.9 million. And T. Rowe Price only speaks in terms of what I need on a monthly basis.

Problems? I've Got Some
1. Assumptions not provided. Many of these calculators do not provide their assumptions. So you have no idea how they decided you need a bazillion dollars by the time you are retiring.
2. What is a dollar worth? Let's talk more about the value of a dollar in the future. Some calculators account for this, but many don't even mention the idea that a dollar will only buy you an already chewed piece of Bazooka bubble gum in 2039. Even worse, sometimes there is no mention of whether the dollar amount given to you reflects the idea that a dollar will buy way less in the future or whether it reflects today's purchasing power.
3. Huh? What? The varying degrees of answers I got just makes me realize that nobody seems to really know how to answer you in terms of providing advice on saving for retirement.

So now that I have thoroughly confused myself and my readers, I have decided to revisit this idea of calculating retirement nest eggs on a more in depth basis in future blog posts. Hopefully we can put our heads together and come up with a sensible solution for calculating a reasonable answer to the question 'How much should I save for retirement?'

Stay tuned,

Do you have any helpful tools you have used to help you figure out how much to set aside for retirement? More importantly, WHAT are those old people doing in that photo???


Frugal Student said... Best Blogger Tips

Part of it, is how much they assume inflation will be, another is how much they assume your investments will increase.  Couple that with determining what percent to pull out and it pretty much is a shot in the dark.

60kproject said... Best Blogger Tips

That might be an understatement! I'm beginning to believe that the best way to estimate your retirement savings is to do it completely on your own. At least that way you know what all the variables and estimates are and how every calculation fits in to your model.

Miss T said... Best Blogger Tips

I agree. Inflation is the big ticker when it comes to planning.If you baseline a reasonable estimate you will be ok but if you estimate way off then you can run into trouble. Saving all that you can for retirement is the safest bet.

Sarah said... Best Blogger Tips

@Miss T Miss T, I'm leaning toward your advice and seriously considering maxing out my 401(k). I would rather save too much (if that's even possible) than not enough.

Debt Consolidation said... Best Blogger Tips

Thanks for this helpful post. I’ve been looking around the site for a few weeks, and I really enjoy reading your posts There are so many blogs out there, its nice to find a good one!.

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