Friday, December 29, 2006

Retirement Calculator Evaluation - Vanguard

Overall, I thought the Vanguard Retirement Calculator was a reasonably accurate estimator for how much is needed. It takes salary growth (due to inflation), social security payments, and life expectancy during retirement into account.

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 column. (For specifics on this economic-speak, see example #2 below.)

This calculator asks for the following information:

1. Household Income
2. Percentage of Income Needed after Retirement
3. Social Security Benefts
4. Annual Pension Benefits
5. Current Savings
6. Annual Retirement Savings Contribution
7. Annual Investment Returns
8. Years Until Retirement
9. Years in 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 total income
2. 100% income needed in retirement
3. $25,560 Social Security (used 55 year old numbers)
4. $20,000 annual pension
5. $10,000 savings
6. $5,000 savings per year
7. 8% savings return in retirement
8. 1 year until retirement
9. Life expectancy – 95, i.e. 30 years in retirement

Income needed for retirement. $52,000 in year 1. The calculator shows that Will’s retirement income will be $48,786. Most of it is covered by Social Security and his pension. This situation is acceptable since Will is so close to retirement. However, the calculator recommends Will needs to save about $185,000 more to account for the possibility of higher inflation. Thus, Will savings is currently short and should work longer before retiring.

Example 2 – Em. S. Grad is 35 years old and plans to retire at 65. Em’s information is different that Wills in #3 (social security payments), #4 (assume there are no longer pensions), and #8 (30 instead of 1 year to retirement). In addition, Em expects to retire as a Division Manager, which has a current salary of $150,000.

1. $50,000 total income
2. 100% income needed in retirement
3. $28,638 Social Security
4. $0 annual pension
5. $10,000 savings
6. $5,000 savings per year
7. 8% savings return in retirement
8. 30 year until retirement
9. Life expectancy – 95, i.e. 30 years in retirement

Amount needed for retirement: $1,266,596 to enable $162,000 per year of retirement income. And the calculator judges that Em is on track to provide $152,036 per year, assuming Social Security payments increase at the rate of inflation. Thus, Em will need to save about $1250 more per year to reach his goal.

However, the calculator doesn’t account for non-inflation related salary increase. Thus, $1,266,596 should be Em’s minimum retirement savings target.

To account for a higher salary due to promotion or job change, I recommend that Em should 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. (For reference, I also changed the Social Security payment to the maximum of $36,864.) With this adjustment, here is what Em would need for a retirement nest egg: $6,708,059. This would represent the high side retirement savings target. For reference, this number is close to the T.Rowe Price calculator estimate of $7,427,816, which did not include Social Security payments.

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:, Emily Roesly

This is not financial or retirement advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC


Anonymous said...

Em. S. Grad's numbers are scaring me. Worst part is I cannot do anything about it right now ..except keep saving each month. Sometimes I am wary of these numbers in millions of dollars...I think people expect too much from their retirement life and are afraid to adapt to changing conditions.

Super Saver said...

Golb Guru,

Thanks for the comment and great points. As you pointed out, the exact number will vary depending on an individual's investment and retirement lifestyle choices. I will add a note that "Examples are illustrative purposes only. Your results will vary with different inputs and assumptions."

Agree with you that the millions seem daunting. However, I can see why the numbers are so high for someone who is 30 years from retirement.

First, with 3% inflation, the amount of money needed in 30 years will be a little over 2.4 times today. If inflation is 4%, 3.2 times today's salary will be needed.

Second, over 30 years, that person's real wages and real standard of living may also rise. Say another 1.5 to 2 times. Thus, one could estimate that the average 35 year old will likely need 4 - 6 times their current salary in retirement.

Third, life expectancies will be much longer in the future, requiring larger nest eggs (at 20X of desired retirement income) that will last. I used 30 years, which may even be conservative.

On the help side, people hopefully will have paid down debt, and reduced the amount of money needed. This would enable them to live on less that 100% of their pre-retirement salary. (To note, many of today's retirees surprisingly spend 100+% of their pre-retirement income due to vacations, visiting grandchildren, etc.)

Finally, agree with you that saving (even small amounts) early is a great strategy. Compounding and time is a great ally in building wealth.

Lots of factors and uncertainties, which make it very complicated. That's part of the reason I started using a Financial Advisor who has computer programs to analyze different scenarios. We do check-up about every 4-6 months. (Yes, this is probably checking more often than needed but I like to make sure I am on track:-)

Dimes said...

Unfortunately if you have more than 40 years to go until retirement, you have to lie and say it's only 40, otherwise it yellow-triangles you back. However it does seem better than a lot of other calculators I've seen.

Super Saver said...


Thanks for catching this additonal outage in the Vanguard calculator. It doesn't seem that creators of any retirement calculators are thinking of people in their 20's to 30's when designing the algorithms.

Anonymous said...

I'm struggling to find a financial calculator that has the capacity to cope with some know changes in my working career. I'm a military officer, preparing to retire at age 42 with a fixed, inflation-adjusted lifetime income beginning at age 42.

I've been unable to find a calculator that allows me to enter my current income/investments, as well as a guesstimate of my second career income/investments (beginning at age 42).

Do you know of any calculators that do that type of calculation?



Super Saver said...


Thanks for your comment and question.

I have not seen any Web calculators that have the flexibility to cover the complexity of your situation. None that I have evaluated allows easy input of multiple changing streams of income.

Something that may help are the Monte Carlo (or other) simulation programs that some financial advisors use. From the analysis I have seen from my financial advisor, the simulation program allows for inputting data from situations such as yours.

If you do not currently work with a financial advisor, many advisors will provide a free initial consultation with a top line analysis of your situation. If you would want more specific followups, they can do a more detailed analysis for an hourly fee.

The caution I offer is that there are lots of financial advisors and, in my opinion, only a small percentage are good ones. It is important to do the work to find a good one. For example, I found my financial advisor by attending their educational seminars, meeting with them for a consultation, and checking with colleagues on experiences with the advisors.

Good luck on your plans to retire at 42.

Jim said...


I hope you won't consider this spamming your site, but in reading the comments of the previous posters, I felt compelled to add my two cents.

I'm the author of a free online retirement calculator called the As the name implies, the planner is all about flexibility and I worked really hard to build a tool that could handle all the details of real life plans including varied income and expenses, tax rate changes, changes in investment returns, and more.

The result is a Monte Carlo simulation based calculator that I think has everything that the previous posters requested. In addition, I spent a fair bit of time writing documentation on how the planner works and I even posted the most critical Java source code.

If you have some time and could give it a look, I'd be very interested to hear what you think.


Jim Richmond

PS - I'm resubmitting because it looks like I didn't type the word verification correctly...