You can’t always get everything you want from a retirement calculator, and you may not find a calculator that offers these features, but the more of these features you can find, the more accurate and complete your retirement projections may be.
Here are 10 features to look for in your next retirement savings calculator:
Clear and easy to understand list of assumptions
Financial calculators will not be able to capture all the questions needed to properly assess your retirement projections, nor would you want them to. Going through these questions would require much complexity and would mean a super long list of fields to fill out. However, a clear and easy like of assumptions is needed to cover the questions that were not asked in the fields themselves. A good retirement calculator should have a clearly marked link for assumptions, or have the assumptions outlined below the calculator.
Assumptions help to get a better understanding of how the final answer (retirement projection) came to be. It also allows us to bring our projections higher or lower than the result given once we know what assumptions were made. Without knowing the assumptions made in the calculations, we may end up under or over saving for retirement. Common assumptions made in many retirement calculators include: government retirement benefits included, whether inflation was factored into the calculation and at what rate, life expectancy rates etc.
Includes inflation in projections
Inflation makes the same items cost more and more each year, so not factoring this in a retirement calculator can really affect the result. Although many calculators factor inflation in their calculations, it is important to confirm if they do and what rate is used. Most retirement calculators will use a rate of between 1.5%-2.0%.
For example, $200 in 2000 will cost you $292.25 in 2017. To see how inflation impacts long term savings, click on the Bureau of Labor Statistics inflation calculator.
Account for before and after-tax investments
Good retirement calculators account for before and after-tax investments. Putting before tax dollars in a 401k (Registered Retirement Savings Plan in Canada) has tax implications both now and at retirement. On a similar note, putting after-money in a Roth IRA (Tax-Free Savings Account) also has tax implications before and during retirement. Comparing both before and after-tax investments against current and projected income at retirement can help you determine where to withdraw funds from first. Retirement calculators that combine before and after-tax investments fail to account for tax implications and may distort future projections.
Allow for different rates of return in projected calculations
This is not a must have, but if you can find a retirement calculator which allows you to input different rates of return for the same projection, this is a bonus. Alternatively, you can guesstimate the average rate of return of all your individual investments and use this number as well. Because no one can predict future rates of return, whether you use an average or can add individual rates makes little difference, but it is nice to have.
Provide opportunities to input multiple scenarios
Most retirement calculators only allow you to input a set of information which would generate one retirement income projection. Fewer calculators offer users the ability to compare two (or more) scenarios based on changing only a few fields. Being able to compare two scenarios is ideal when comparing best or worst-case scenario. For example, a couple may want to compare their retirement income projections on a one or two income household. An individual may want to compare the financial impact of putting an additional $50/month towards their retirement. Having more than one scenario and being able to compare these numbers without hitting the refresh button can provide the impact needed to make a change.
Accounts for government senior benefits and/or gives you the option to
Many retirement calculators will account for government retirement benefits based on the country the calculator was developed for. If government senior’s benefits are included in the overall retirement income projections, it is important to understand clearly the assumptions made and dollar amounts used for these projections. For example, some calculators may use the average or maximum monthly seniors benefit payout (e.g. Canadian Pension Plan or Social Security) in addition to your personal retirement savings to come up with your projections. Knowing whether maximums or averages were used may help you determine whether the final number may be too high or too low.
Even fewer calculators offer users the option to include government benefits amounts in the calculation or not. Not including these amounts would mean only employer and private pensions (what was inputted by the user) would be used.
Allows for individual and couple retirement projections
Being given the option to do just an individual retirement projection or a couple’s retirement projection can come in handy when planning future retirement goals with your significant others. Regardless of how you split the expenses and retirement savings in the home, being able to combine future retirement income projections can help your household get a better idea of what retirement will look like in the future for you.
Offers numerous ways to illustrate the results
Retirement calculators that represent the information in many different forms allow the user to see the numbers from a different perspective. For example, calculators that offer a savings rate (the percent you would need to save each year to reach your retirement savings goal based on your current income) helps users plan their monthly budget and determine how much they need to put aside each month. Amortization schedules can help a user determine when they reach certain thresholds in their retirement planning journey. Graphical representations like bar charts and line graphs provide a bigger picture of the overall trend one’s net worth is heading towards.
Allows you to input a retirement goal and offers a monthly plan to bridge the gap
Some financial calculators merely tell you what your retirement nest egg will be based on your current income, current investments and monthly savings plan. Although this information is useful, it may be only part of the overall picture. If someone is interested in reaching a specific retirement goal (e.g. one million dollars), being able to input this information, along with the others will help the individual know if they are on track to reaching their goal. More importantly, they will know how much more (or less) they may need to save each month to reach this goal. This additional piece of information can offer a lot of motivation for those wanting to reach a specific dollar amount in retirement savings.
Makes some assumptions for you
A retirement calculator that requires you to know all the pertinent and minute details of your retirement can be difficult and time consuming to complete. Making assumptions of numbers like government benefits, life expectancy etc. can help reduce some of the stress associated with users needing to come up with these numbers themselves (many of which are not readily known by users).
Although it would be awesome, it is very unlikely that one calculator will have all the 10 features mentioned above. However, even having half of these features mentioned can improve retirement income projections. In many instances, the more information needed by the user, the more detailed and comprehensive the retirement projections.