This retirement planning calculator helps you plan your savings such way to have a decent life with a satisfying annuity payout during pension time. More on this matter you can learn below the calculation form.
Understanding retirement planning
Nowadays retirement planning is a common financial concept that refers to all measures people take in advance, while they are still active in order to ensure a decent life during pension benefits time or the so called annuity or payout time. People start saving, making deposits and investing money from their current income in order to reach enough funds for the inactivity period.
Since its main scope is to ensure a financial independence during inactivity time, this kind of planning should take account of the answers on this kind of questions:
1) Which is the desired retirement age? Is it the right moment to retire from all point of views?
Answer: usually people decide to retire at the age of 65 or similar, but there are cases in which people prefer doing so earlier which is not a bad idea. If you retire earlier you only have to ensure that you own the money required to finance your annual expenses for the next years.
In general specialists recommend retiring at the right moment, which can be translated as the moment when you really need to from physical point of view or due to the need to maintain a good health and/or mental condition. Some people make the mistake to retire earlier than they really should and they either regret afterwards or confront with financial problems.
2) Which are the expected annual expenses during pension time?
Answer: make your own budget today in order to have a clear image of your annual expenses and try to estimate which will be the level during retirement. Will it be the same, higher or lower than it is now? Please remember that you need to consider the inflation too. During payout time, usually people need somewhere between 70 – 85% from their annual income before retirement.
3) The existing savings and estimated pension benefits cover the expected annual expenses during payout period?
Answer: Oncethe annual life cost is estimated next step is to assume which is your life expectancy. This will further help you figure out how many years you have to receive your annul income. Once this second variable is known you need to check if your current retirement account equals or exceeds the annual income required multiplied by the number of years to be paid out. If the answer is NO, then you either have to delay your decision on retirement or you can keep it the same but ensure extra income is added to your final balance.
4) What are the measures to be taken before retirement in order to achieve the income that can ensure a happy life?
Answer: few measures to achieve your goal are:
- Increase your savings and/or your contributions to your 401k plan which in most cases require you to identify new income sources, get new job;
- Search for a professional and independent financial advisor whom can help you decide whether to invest in new instruments or make another allocation of your funds;
- Revise and take the decision to delay your retirement age in order to extend accumulation phase;
- Search and apply for other deductions if applicable.
5) What are the best financial instruments to invest in to maximize the chances to achieve your desired income level during payout phase?
Answer: as financial instrument’s return rates change over time, you have to permanently assess whether you have better options to allocate your resources such way to maximize the return.
6) What is the risk exposure on the financial instruments you invested in?
Answer: together with a professional advisor when assessing the right instruments to invest in, you have to evaluate and understand very well the associated risks of every instrument. This is a critical step in retirement planning as risky or volatile instruments may affect your overall balance account. Think of what happens if you buy shares and their price decreases dramatically with no immediate perspective to recover? They will definitely affect your retirement savings in a negative way, so you have to be aware of such risks.
How does this retirement planning calculator work?
An analysis like the one we detailed above is a good start and whenever the case it is recommended to use a retirement planning calculator like the one we provide, because it will quickly help you figure out what is your current situation. Please note that retirement should be planned well in advance, especially in terms of financial stability that can be achieved through a proper level of savings while still employed.
The data you should input in the calculation form is organized in main 3 categories designed to take account of the main aspects when planning your pension:
- Your current situation:
- Your current age
- Your current annual income
- Your current savings available for retirement
- Your retirement goals:
- Your desired retirement age
- Your estimated annual expenses: the annual expenses in retirement, including taxes in today's dollars.
- Your projections:
- Your life expectancy: how long you expect to leave
- Your expected average return rate on your investments: expected REAL (inflation-adjusted) average return on your investments/savings portfolio
- Your expected social security
The outputs displayed by this retirement planner are detailed in the following rows:
- The time you should continue saving is calculated as the difference between desired retirement age and current age;
- The total amount you will need during pension benefits time in today's dollars which is calculated as the product between the retirement years (difference between life expectancy and desired age of retirement) and the estimated income needed from your investments/savings in order to cover the remaining part of your expenses during payout phase (including taxes, in today's $. This amount is obtained after the deduction of the social security from the estimated annual expenses);
- The income needed from your investments/savings in order to cover the remaining part of your expenses during retirement (including taxes, in today's dollars) is obtained after the deduction of the social security from the specified annual expenses;
- The amount of money needed from your new/current savings in order to achieve the goal at retirement is calculated as a difference between the total amount you will need during payout (in today's dollars) and the total income from your current savings;
- Yearly savings you need to make at the expected average return rate (in today's dollars) in order to achieve your balance goal;
- The proposed saving rate is a percent of your current annual gross income, which indicates how much you should save from your current annual income.
When can I retire?
One of the critical questions everyone asks or at least should ask before planning pension is when to retire. Apart from legal requirements in force that regulates the retirement age, the best answer should take account of two different capabilities:
- First capability is directly related to how do you feel and to your health condition or to how many years do you feel you can be active?
- The second is in a direct relation with planning the income needed to finance your retirement.
We will try having an approach on these two problems that once clarified may help you decide with no major doubts when to retire.
Strictly speaking about how you feel or how is your health condition, you should note that it is recommended to take your “break” when you really feel you need to. There were many cases in which people retired earlier than they should and the result was that they got unsatisfied by their lifestyle, while for other people staying active even after the retirement age kept them in a good condition. But, there were as well cases in which people retired earlier and their overall condition improved, which means their decision was correct. It is rather a matter of what you plan to do with your time, because if you will use it properly the chances to enjoy your retirement increase significantly and you will most probably feel perfect.
Then strictly speaking about your retirement savings you should take into account that once retired you should have enough funds to maintain a decent life standard for the years to come. Don’t be too optimistic, neither pessimistic when assessing your financial status.06 Dec, 2014