Saving for retirement is one of the biggest objectives of investors. In the last 40 years, the emergence of the individual retirement account (IRA), 401(k), Roth IRA, SEP IRA and other investing tools have made saving for retirement accessible for a large part of our population. And with the market being at or near record highs, your 401k may be doing better than it has, and certainly better than you may have imagined back in March.
But one of the consequences of the novel coronavirus is that many Americans have been downsized. And for those of a certain age that is causing them to consider the possibility of a retirement that is much earlier than they had planned.
I hope that’s not what brought you to this page. But whether it did or not, I have good news. MarketBeat has a new, easy-to-use tool that can help you see where you stand in your goal of a sound retirement. The MarketBeat retirement calculator requires you to provide some basic information based on the goals you have for your retirement. The calculator does the rest.
Step 1: Input Your Current Age and the Age You Wish to Retire
Time is one of the most important elements of a retirement plan. The sooner you start saving for retirement, the better. Likewise, the longer you can delay retirement, the better. If you’re younger, you may want to see how adjusting your retirement date below 65 affects your savings goals. If you’re closer to 65 you may want to see how extending your retirement date by a few years may help you have the retirement you desire.
Step 2: Provide Your Planned Monthly Savings
For most investors, you can find this right on your retirement account statement. You’ll know how much you put in every month. Don’t forget to include the amount that your employer matches. That will be essential to getting an accurate number. Also, remember that this is a tool that lets you see how increasing or decreasing your retirement savings will affect your retirement. The key to remember is that this tool is about today. As your income changes, you’ll need to revisit the tool. Also, if you have are putting money into a separate account, you may want to calculate that separately.
Step 3: Provide the Amount You Currently Have Saved
This is where the retirement calculator can become a “choose your own adventure” activity. For many Americans, a retirement account is their sole source of retirement savings. However, other investors may have other taxable investment accounts that they are planning on using in their retirement. You can choose to put all of the accounts in this field. Or, you can do the exercise for only the money you have in a particular retirement account.
Step 4: Provide Your Expected Investment Rate of Return
This is also known as return on investment (ROI). And it can be subjective, but there are ways of being as accurate as possible. A good rule of thumb is that things regress to a mean. In other words, past performance does not predict future results. If you are a more conservative investor, you should choose a rate of return closer to 6%. If you’re a more aggressive investor, you may go higher if the history of your investments warrants it.
If your retirement account is in a fund, you can look at the fund’s prospectus to see what the current expected rate of return is. You can look at the fund’s performance over several years. If you have more years until retirement, then you may want to look at what the fund’s performance has been over the last 10 or 20 years (if available). If you’re nearing retirement, it may be best to look at what the fund has averaged over the last one to five years.
Remember no investment moves the same way all the time. It’s better to be conservative in this field.
Step 5: Provide Your Expected Withdrawal Rate During Retirement
Essentially this is asking you how much money (as a percentage) you want to withdraw every year throughout retirement so you don’t run out of money. Most experts advise that you plan on taking out no more than 4% or 5% of your savings in the first year you retire. After that the amount may change based on inflation.
Keep in mind, you will be receiving Social Security income that will be separate from what you will be relying on from your retirement savings.
Step 6: Provide Your Desired Annual Retirement Income
This may seem like an odd thing to put at the end, but it’s a good reality check. A retirement is a personal decision. Some people will be comfortable living in their current home, and maybe taking a few small trips a year. Others may have much more elaborate, and expensive, retirement plans. This is where you have to be realistic about your goals and expectations. This is particularly true if you have a spouse. This doesn’t work if your idea of retirement is traveling the world and theirs is to winter in a warm state.
Whatever your plans are, you know you’ll have some predictable expenses. And don’t forget that medical expenses are likely to go up during this time as well.
The final word about using the retirement calculator
If you get nothing else from this exercise, please understand that you do yourself no favors by providing inaccurate data. Retirement is a personal decision, and how you spend your retirement years is a very personal decision. Understand how much, or how little, you plan to spend in retirement. Of course, things change. But the calculator can only be as accurate as the data you provide.
Which brings me to a final thought; your circumstances don’t dictate your final outcome. Ultimately your actions or inactions towards those circumstances will determine if you meet your retirement objectives. If you’re not on track, it doesn’t mean your retirement is shot. Hopefully you still have time to make corrections. That’s why we’ve created the tracker. It’s yet another reason you can continue to trust MarketBeat.com with information that helps you with one of your largest investment goals.