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Retirement Calculator

Retirement Calculator

If you are nearing retirement age and thinking about how you will afford the cost of living upon leaving the workforce, or you are in your early 20s and just beginning to enter the work force, you will need to plan accordingly.  This requires the use of a retirement calculator.  A retirement calculator is a tool that individuals use to calculate the amount of time and resources they will need to afford to retire comfortably.  By using a retirement calculator an individual will be able to determine how much they need to save, and for how long, to be able to retire.  When using a retirement calculator you may find that you can retire early or that you may have to prolong retirement due to changes in your savings.

Information you will need for your retirement calculator

When using your retirement calculator you will need a plethora of information in order to properly come up with your retirement information.  Information that you will need for your retirement calculator include your savings; 401k, Roth IRA and other qualified retirement plan information; mutual funds; stocks; mortgages; pension plans; inheritance, and social security.  There are a number of advanced calculations that go with using a retirement calculator.  You should determine your typical annual raise from your employment, your current annual increase in your savings plan, and inflation.  

How to use your retirement calculator

The first thing you will want to do when using your retirement calculator is determine at what age you want to retire.  Since you will have no regular income from your job once you retire you will be forced to rely solely on your savings, pensions, amount in retirement accounts, and social security benefits.  If you wish to retire before you reach the age of 65 you will be required to have more money in your savings due to the fact that individuals in the United States are not eligible for social security benefits until they reach the age of 65.  

Secondly, you will want to when using a retirement calculator is determine your yearly savings.  This will require you to develop a cost of living income calculator to determine how much your expenses are on a yearly basis and how much you are actually saving.   Your savings, included in your retirement calculators, should include not only your savings, but your current annual increase in savings.  

Also included in your retirement calculator should be your contributions to a 401k or other qualified retirement plan.  Qualified retirement plans are beneficial in a number of ways.  First of all, qualified retirement plans are classified as pre-tax deductions.  This means that the amount of money that you put in will not be taxed immediately by the federal government.  The benefits may not seem like much but those benefits are actually calculated in the amount that you save, not in the amount that you earn.  For example, if you make $120,000 per year and you invest $10,000 to your qualified retirement plan then you will have an adjusted gross income of $110,000.  This means that you will not be taxed on the $10,000 and essentially save $2800, based on a 28% tax rate.  The federal government allows for an annual investment of $16,500 into an individuals qualified retirement plan.  If you are over the age of 50 then you are permitted to contribute an extra $5,500 per year.  This is referred to as the “catch up provision.”

Another benefit of a qualified retirement plan is the employer contribution.  An employer, by law, is permitted to match contributions by an employee to a qualified employee retirement plan up to 3% of the of the employee’s salary.  This means that if an individual making $100,000 contributes $3,000 or more to a qualified retirement plan then the employer will match up to $3,000 to the same account.  It is important to discuss with your employer what kind of contribution, if any, the employer will make to the qualified retirement plan.  Once you start to take money out of your qualified retirement plan is when it is taxed.  This has certain consequences.  You will be taxed at the level of income that you have at that moment in time.  If you are retired that income may put you in a lower tax bracket and save you money.  Once you put money into your retirement plan you should leave it alone until retirement.  Not only will tapping into your retirement plan affect your retirement calculator but you will also be hit with tax penalties for deducting early.

In addition to savings, projected savings, and income from a qualified retirement plan, you will also want to include pension plans in your retirement calculator.  Pensions from government and union employment, and other employment, will be a great contribution to your retirement calculator.  In order to qualify for 100% pension you will be required to be employed for a specific period of time.  You will need to discuss with your employer all aspects of your pension plan to determine what percentage of your salary you will receive at retirement and when you can retire to receive 100% pension.  

You will also want to adjust for inflation when using your retirement calculator.    The typical annual increase due to inflation is roughly estimated at 3% per year.  This information is not only beneficial for use in your retirement calculator but also for determining investment strategies.  When investing in a retirement plan or in mutual funds you should focus your investments based on an expected rate of return that is higher than the average yearly inflation rate.  

If you are over the age of 65 years old you are guaranteed benefits from social security.  These amounts vary on your specific age but once you turn 65 you will be entitled to receive a monthly payment from the federal government that will essentially be your income upon retirement.

What to consider in your retirement calculator

There are a number of factors that you should consider in your retirement calculator.  One of these factors that you need to consider you is that once you retire you should expect to be living off of 60% – 80% of your salary at during the later years of your employment life.  

With your social security benefits, pensions, savings, investments, and other investments you should be able to determine how much money you will be able to spend in any given year of your retirement.  This amount should be increased, or decreased, depending on the age you wish to retire.  It may sound morose but you should use this information, in conjunction with the average life expectancy to determine, through your retirement calculator, how much money you will need to cover retirement for the rest of your life.  For example, if, at the age of 35, you determine that you want to retire at age 60 and the average life expectancy is 80 years then you will have to use a retirement calculator to determine how much money you will need to save over the next 25 years   to last for 20 years after retirement.  You will need to remember that for the first 5 years of your retirement, in this example, you will need to remember that you will not be receiving any social security benefits.  This may mean that you will have to save more money for the first 5 years of your retirement.

One of the major factors that you will need to consider when you are making adjustments to your retirement calculator is determining where you will want to retire.  This factor alone can completely change the amount of money that you will need to retire, when you can retire, and your standard of living at retirement.  Different areas of the country, even different areas of a state, have different costs of living that vary greatly.  Where it may cost you $50,000 a year to have a specific standard of living in Washington, D.C. it may cost you $75,000 to maintain the same standard of living in Manhattan.   You can see how this will drastically change the amount of money that you will need at retirement.  Just a matter of 10 years could mean an increase in your total savings of $250,000 just to maintain the same standard of living over that period of time.  

In order to retire properly you should make sure that you are capable of retiring.  It is recommended that for the year before you are expected to retire you should cut your living expenses by 25%.  This is because, in total, you will probably be living off of 70% of your current income.  By cutting your expenses it will allow you to make a trial run and determine whether you are capable of retiring and still achieving the goals that you want.  

You can find many retirement calculators over the internet through a basic internet search.  Many websites offer complex retirement calculators that will request your information to plug into the queue.  By inputting your specific data you will be able to determine how much you will need to retire.