Can You Afford to Retire?

How do you know if you’ve saved enough to retire? Will you outlive your savings? In other words, can you afford to retire? Fortunately there are tools available called retirement planning calculators that can help you get answers.

Simply put a retirement planning calculator assesses whether you have enough saved to cover your expenses throughout your retirement years. There are two broad groupings of calculators – detailed and summary. A detailed retirement planning calculator enables you to enter your expense budget, income sources and investments. A summary level calculator asks for data that is aggregated. For example, a detailed calculator may ask you to enter multiple data fields such as housing, utilities and transportation. A summary level calculator will only ask you to enter “expenses”. The same holds true for income and investments. Both types of calculators will produce a result that shows whether your approach is working. However, the detailed retirement planning calculators provide more information and capabilities.

So which type of calculator should you use? If you are under 50, a summary level calculator should suffice. All you really want to know is whether you are on track at a high level. However, after 50 (or sooner if you are considering early retirement), you should use a detailed retirement planning calculator. The results from a detailed retirement planning calculator are tailored to your personal circumstances and therefore you should have a higher level of confidence in them. Another feature that some detailed retirement planning calculators have is the ability to analyze “what-ifs”. Let’s say your results come back and show that you will run out of money somewhere down the road in your retirement. You can use the calculator’s “what-if” capability to investigate whether certain changes can get your plan back on track. Some common what-if cases include: delay retirement and work more years; reduce your expenses; increase your savings; work in retirement; and change your asset allocation.

Here are a couple of examples of both types of calculators.

Detailed – Fidelity Retirement Income Planner; The Flexible Retirement Planner (requires Java)

Summary – Vanguard Nest Egg Calculator; Schwab Retirement Calculator

There also some in between, but much closer to the summary level, such as those from Motley Fool and AARP. You can substitute one of these for a summary level calculator but not a detailed one.

One of the by-products of using a retirement planning calculator is that it encourages you to communicate with your spouse, family or financial planner. You need to jointly decide when you plan to retire, when to take Social Security, how much to save and to spend. Are you going to relocate? Do you want Long Term Health Insurance? The list goes on. The good news is that if you use a retirement planning calculator, you won’t be making these decisions in a vacuum.

While I consider the use of a retirement planning calculator to be essential, I need to point out that you should not rely on it exclusively to make your retirement decisions. Here are some other factors to keep in mind.

  • Retiring in a period of down financial markets can severely affect your savings draw down rate and increase the probability that your plan will run out of money. Therefore it is very important that you keep an eye on the state of the markets, the economy and world events so that you give yourself the best chance of retiring in stable times.
  • An unexpected event such as a health issue can throw a monkey wrench into your plans. Be sure to include provisions for health insurance into your planning.
  • Be sure to work with your company’s HR department to make sure that you understand what benefits may transition with you into retirement and how to deal with financial accounts such as 401k’s or Roth IRA’s.
  • 40% of people end up retiring earlier than planned. So even if your plan looks good, consider planning conservatively (plan for the worst, hope for the best) to provide a cushion if you should be forced to retire.
  • Get a second opinion. While the detailed retirement planning calculators are very sophisticated, that’s not to say they don’t have weaknesses. Try running some numbers using a simple spreadsheet. Review your plan with a financial professional.

If you’d like to see an example of how to use Fidelity’s Retirement Income Planner check out Parts 6 and 7 of my personal budgeting series on YouTube.

And, if you are using a retirement planning calculator that you love (or maybe not so much), I’d love to hear about your experience. Please send me an email or use the contact form on retirementjourneys.com.

Note: the information contained in this article is not offered as advice or guidance. Its purpose is illustrative – not instructive or prescriptive. As always, consider seeking professional advice when it comes to your financial decisions.