Overall, I thought the T. Rowe Price retirement calculator was a reasonably accurate estimator for how much is needed if one is close to retirement, e.g. with 5 years.However, if one is more than 10 years from retirement, you may need to make an adjustment to one’s estimated salary. The calculator does not account for the possibility that your salary may grow faster than inflation during your early working years – e.g. due to promotions or job changes. For those that are 10 or more years from retirement, it may be necessary to project what your future salary may be and put the present value in the salary input field. (For specifics on this economic-speak, see example #2 below.)
Another gap I found is that it doesn’t include when social security payments begin and, therefore, it may overestimate how retirement savings is needed. Of course, overestimating savings needed is better than underestimating:-)
This calculator asks for the following information:
1. Salary
2. Tax Rate
3. Inflation Rate
4. Years until retirement
5. Projected Lifetime in years after retirement
6. Percentage of Income needed after retirement
7. Rate for Return on Savings in retirement
8. Taxable Savings accounts
9. Rate for Return on Savings until retirement
10. Tax Deferred Savings
11. Rate for Return on Tax Deferred Savings until retirement
After filling out the information, the calculator lets one know whether you have sufficient savings or the amount that one needs to save before retirement.
Example 1 – Will B. Retired is a 64 year old that will retire next year. Here is his information.
1. $50,000 salary
2. 25% tax rate
3. 3% inflation rate
4. 1 year to retirement
5. 30 years in retirement
6. 100% income needed
7. 6% savings return in retirement
8. $10000 savings
9. 8% savings return
10. $10000 retirement savings
11. 8% retirement savings return
Amount needed for retirement. $1,029,256, which leaves Will very short of his target.
Example 2 – Em S. Grad is 35 years old and plans to retire at 65. He has the same information as Will except for #4, which is 30 years. In addition, Em expects to retire as a Division Manager, which has a current salary of $150,000.
1. $50,000 salary
2. 25% tax rate
3. 3% inflation rate
4. 30 years to retirement
5. 30 years in retirement
6. 100% income needed
7. 6% savings return in retirement
8. $10000 savings
9. 8% savings return
10. $10000 retirement savings
11. 8% retirement savings return
Amount needed for retirement: $2,475,939. And the calculator recommends saving $20,461 per year until retirement to reach this goal.
The numbers make sense overall since 30 years from now Em will need about 2 times the Will’s amount to account for inflation. However, the calculator doesn’t account for non-inflation related salary increase. Thus, $2,475,939 should be Em’s minimum retirement savings target.
To account for a higher salary due to promotion or job change, I recommend that Em use the present salary of the position he expects have in the future. For example, if Em expects to be a division manager when he retires, he should input the $150,000 salary of a division manager today. With this adjustment, here is what Em would need for a retirement nest egg: $7,427,816. This would represent the high side retirement savings target.
Disclaimer: Examples are illustrative purposes only. Your results will vary with different inputs and assumptions. As with all retirement calculators, please consult with your financial advisor before taking any actions.
Photo Credit: morgueFile.com, Ronnie Bergeron
This is not financial or retirement advice. Please consult a professional advisor.
Copyright © 2006 Achievement Catalyst, LLC
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4 comments:
Excellent...I dig the numbers and the reviews. I think at some point down the line you should create a post that lists all your posts where you evaluated retirement calculators...it will be a great reference to people who keep using these calculators to stay on track.
Btw, wish you and your family a merry Christmas and happy holiday time.
Golb Guru,
Thanks for your comments.
I have two more evaluations to do and then I will do a summary post. I plan to also reference your article on the Fidelity Calulator in the summary.
Merry Christmas and Happy New Year.
I saw a couple of problems:
(1) It did not have a spot for Roth IRA/401k assets
(2) The annual savings goal to make up the shortfall was not adjusted for inflation. It should rise with inflation.
I haven't found any web-based retirement calculators I like. I prefer to make my own projections, using a spreadsheet.
EMF,
Agree with you on web-based retirement calculators not taking into account the relevant factors for every individual who uses it. Thus, there is always some level of inaccuracy.
On #2, that is good point. It is another outage that the calculator provides a constant savings value, versus one that is lower in the beginning and higher in the later years, to account for inflation.
On #1, another good point. There isn't a place for future 401K or IRA savings. There was only a location (line 10) for current 401K and IRA assets.
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