Many advisors think retirement savings calculators have more weaknesses than strengths, and I won’t argue. Most use an average annual return on investment to calculate investment returns, which can create unrealistic projections. They also assume that you can roughly estimate your annual spending for the next 30-plus years. But even using generous assumptions, it’s hard to account for unanticipated expenses, like medical bills. It also oversimplifies retirees’ spending habits—many retirees can and do adjust their spending when their circumstances change, which a retirement savings calculator doesn’t account for.
But despite their drawbacks, running some numbers through one of these calculators can give you a good starting point for deeper planning.
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If you’ve already used a retirement savings calculator, feel free to plug in those numbers in this exercise. If not, the retirement calculator below accounts for more variables than most, including “modern” retirements where you’re still earning some income. Give it a try here.
Some of these numbers are almost guaranteed to change, but filling out the worksheet will give you a starting place for your income investing.
How a Retirement Savings Calculator Works
While a retirement savings calculator can give you an idea of how much income you’ll need to generate in retirement, it also makes a lot of assumptions. Expenses are very difficult to predict—especially health-related expenses—and these calculators usually don’t take into account retirees’ ability to adjust for changes in life circumstances. If you have higher medical expenses one year, for example, you may choose to cut back elsewhere rather than dip into your savings.
Another thing you can’t control is the market. Over a long enough period of time, the stock market’s trend is up, but it’s impossible to predict what it will do from year to year. Even expected equity returns based on historical averages are just guesses.
Bond yields introduce more uncertainty: many retirement calculators still assume today’s “unusually” low bond yields will return to their historical averages sooner or later, but there’s no reason to believe that will be the case. Many analysts forget that until the mid-1950s, the dividend yield on the S&P 500 exceeded the yield on 10-year treasury bonds for decades.
All these uncertainties can make planning for retirement seem futile. But don’t despair. You don’t have to know exactly what’s going to happen in the future to make a solid plan.
When you pack for a vacation, you don’t know exactly what the weather will be like, but you can still plan fairly well based on forecasts. If you’re going to San Francisco in June, you can find out that the average high that month is 66º and the average low is 53º, and be reasonably sure you don’t need a heavy coat, but you’ll probably want a jacket. If the weather turns out to be unseasonably warm during your trip, at worst, you’ll regret the wasted space the jacket took up in your luggage. You can also look at the average number of rainy days in June and decide whether to bring a raincoat or umbrella. In San Francisco, it rains about 13% of the time in June. If you decide not to bring a raincoat, and it rains one day of your trip, you’ll probably think you made the right call. If it rains almost every day of your trip, you’ll wish you’d brought a raincoat and umbrella—and curse statistics. But the odds of that happening are so small, the possibility of it happening doesn’t necessarily make it worth packing for.
Retirement planning is, believe it or not, similar. It’s impossible to know exactly how your portfolio will perform over the next 10, 20, 30 or more years, but you can predict a range of likely situations, and position yourself accordingly.
If you simply don’t trust a retirement savings calculator, Vanguard has made a valuable tool available on its website that runs a Monte Carlo simulation on your current retirement savings to generate a range of possible outcomes and probabilities for each. A Monte Carlo simulation approximates the probability of certain outcomes by running multiple simulations on your inputs and measuring the frequency of each. You can access the tool by clicking here.
Tools like this avoid predicting exactly what will happen, but can give you an idea of a reasonable expectation for your investments. While neither tool is perfect, the bottom line is the more you prepare for your retirement, the more likely you are to live comfortably once you do retire.
Until that day comes, you should not only be saving for retirement, but investing for retirement. With the right strategy and the right investments, your retirement can be richer, less stressful, and more fun.