To use the retirement calculator, enter your current age, your planned retirement age, your life expectancy, and your current pre-tax income. Then, enter assumptions for income growth rate, income needed after retirement, average investment return, and inflation rate. Press the “Calculate” button to see your estimated retirement savings needed.
Retirement Savings Calculator
How the Retirement Calculator Works
The retirement calculator is a tool designed to help you estimate the amount of savings you will need to retire comfortably. When you input your personal and financial details, the calculator projects your future financial needs and helps you plan accordingly.
Here is the detailed explanation of each field above and how they contribute to the overall calculation. Let's start with your current age:
Your Current Age
This is your present age. It is the starting point for calculating how many years you have left until retirement.
Planned Retirement Age
This is the age at which you plan to retire. The difference between your current age and your planned retirement age determines your working years remaining.
Life Expectancy
This is your estimated lifespan. It helps to calculate the number of years you will need to support yourself financially after retiring.
Current Pre-tax Income ($/year)
This is your annual income before taxes. It serves as the basis for estimating how much income you will need after retirement.
Assumptions
Annual Income Growth Rate (%)
This is the percentage by which you expect your annual income to increase each year. It helps to estimate your future income at the time of retirement.
Income Needed After Retirement (% of current income)
This is the percentage of your current income that you believe you will need annually after retirement. Typically, retirees need about 70-80% of their pre-retirement income to maintain their standard of living.
Average Investment Return (%)
This is the expected annual return on your investments. It is used to project the growth of your retirement savings over time.
Annual Inflation Rate (%)
This is the rate at which the cost of living is expected to increase each year as we all already know. It helps to adjust future expenses to reflect the expected rise in prices.
Calculation Process
- Estimate Future Income
- Using your current income and the annual income growth rate, the calculator projects your future income at retirement.
- Determine Post-Retirement Income Needs
- The calculator uses the percentage of income needed after retirement to estimate your annual financial needs once you retire.
- Calculate Required Savings
- It then determines the total amount of savings required to cover your estimated annual expenses for each year of retirement, adjusted for inflation and investment returns.
Calculation formula
Assume you are 30 years old, plan to retire at 65, and expect to live until 88. Your current income is $50,000 per year, and you expect it to grow by 3% annually. You believe you will need 75% of your income after retirement. You expect an average investment return of 5.99% and an annual inflation rate of 3.6%.
- Working Years Remaining: 65 - 30 = 35 years.
- Retirement Years: 88 - 65 = 23 years.
- Future Income at Retirement: The calculator projects your income at age 65 considering a 3% annual growth.
- Annual Income Needed After Retirement: 75% of your projected income at age 65.
- Total Retirement Savings Needed: The calculator sums the present value of the estimated annual income needed for each year of retirement, considering the investment return and inflation rate.
Benefits of Using the Retirement Calculator
- Personalized Planning: Tailors the calculation based on your specific financial situation and retirement goals.
- Future Projection: Provides an estimate of how much you need to save, helping you set realistic retirement savings goals.
- Financial Awareness: Helps you understand the impact of various factors such as income growth, inflation, and investment returns on your retirement savings.
When you use this retirement calculator, it empowers you to make the right decisions about your financial future and ensures you are on the right path to achieving a comfortable and secure retirement.
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