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Retirement Savings Calculator
Recommended Retirement Savings
Everyone wants to know "How much should I save for retirement?" A retirement savings calculator can help you plan for a successful retirement.
We would all like to hear that we need not save anything. We hope someone else will take care of our future needs (government, employers, rich relatives, or the lottery).
But, the truth is that the traditional sources that have provided for retirees are increasingly pinched for money.
Businesses are looking for way to reduce expenses, reduce the number of employees, and become more competitive with other businesses worldwide. They are less willing to provide long term financing to retirees.
 Even Fortune 1000 companies are getting out of the business of providing defined benefit plans for their workers. (A "defined benefit" plan provides a pension usually based on number of years worked and final salary.)
When a company freezes a plan employees receive no additional benefits for additional years worked or increases in their salary. When a defined benefit plan is terminated employees get a lump sum payment or an annuity.
In addition, a recent study by Watson Wyatt indicates that only 7% of Fortune 500 companies plan no further cutbacks in retiree medical care benefits. Most employers will further increase in employee contributions. And 6% of employers are planning to totally eliminate health benefits for existing retirees.
Governments are beginning to face the reality of many years of spending splurges and failure to responsibly fund the Social Security retirement scheme. For example, the President's 2007 budget calls for spending $354 billion more than the government takes in from taxes--that's an additional debt of about $2,885 for each individual tax return. And the total national debt is about $68,025 for each individual tax return. And, starting in 2017 the government will be paying out more Social Security benefits than it receives in Social Security taxes, adding to these deficits.
All this means that you should increasing rely on your own savings and investments for your financial future. With the information you have, you can use a retirement savings calculator to help you make the best financial decisions for your situation.
So, you're still asking "How much should I save?" And, the answer is, "It depends."
That's hardly the answer you wanted. But, the fact is, the amount you need to start saving right now depends on the following:
- Current annual income
- Percentage of your current income you invest for retirement
- Number of years until you retire
- Percentage annual increase you expect in your annual earnings
- Percentage of your final earnings you'll spend if retired
- Amount of your pension and Social Security you expect to receive
- Inflation rate during your retirement years
- The amount you currently have invested for retirement
- Expected average growth rate of your investments
That all seems like a lot to know to determine how much to invest, doesn't it? And some important factors like the inflation rate are mostly guesses, at best. But, these are the factors that should go into any retirement savings calculator.
So, let's look at a couple of examples to see how this all works out.
Suppose you are a 25 year old starting in a professional job at $50,000 a year with no savings and expect to see increases in your income and inflation of about 4% a year. And you believe you can invest and get a tax free 8% rate of return. You'll invest for 40 years and need about 60% of your then current income for retirement living expenses. You'll consistently invest 8% of your income for retirement.
At retirement you expect to receive an annual pension from your company of $35,000 and Social Security of $20,000.
You can expect, at age 65 after 40 years of investing that your retirement nest egg will be about $1.765,658. That seems pretty good, but your initial annual spending at retirement will be about $144,031. Overall, your investments will provide 29 full years of income before it is depleted. The value of your investments during retirement will look as follows:
If, instead, you had saved 10% of your income instead of 8%, your retirement nest egg would have lasted 45 years. The value of your investments would look as follows:
As you can see, the amount you save is very important over the 40 years of your working career. The more you save, the more you can expect to have at retirement. And, the longer it will last.
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How Long Should My Investment Last?
The average retiree lives about 19 years beyond retirement.
If you are healthy, active, don't smoke, don't drink in excess, eat a nutritious and healthy diet, and have goals for your life, you may live considerably longer. If you are in this group, you may want consider having sufficient funds to last at least 40 years into retirement.
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Next, suppose you are a 40 year old professional with an established savings of $150,000. You have an income is $125,000 and save 10%. Estimating a salary increase and inflation rate of 4% and a rate of return of 8%, at retirement, 25 years later, you will need an initial retirement income (using 60% of the last annual salary) of $199,938 in the first year of retirement. And, suppose you expect an annual pension of $65,000 and Social Security of $35,000
Your retirement investments of $2,390,986 will run out in 35 years. If you had saved 12% of your income your nest egg would run out after 43 years. Saving 15% of income would cause the nest egg to last 63 years.
But, saving 15% with a 5% inflation rate (instead of 4%) changes things drastically. With a 5% inflation rate, your investments would only last 40 years before they were completely depleted.
So you can see that you need to consider a number of factors to determine that answer to "How much should I save?"
By changing various factors in a retirement savings calculator you can better visualize your options. You can download my "How Much Should I Save?" retirement savings calculator spreadsheet here. See how to change various factors to produce desirable results for your case.
 By using the spreadsheet I provide, you can determine to total amount of savings and investments you need to provide for your retirement needs. Most experts suggest you have an increasing amount of that target saved as you grow older. The saving targets are displayed in this graphical display.
The chart shows that at age 30, you should have between 10% and 20% of your target amount saved. At age 40 you should have accumulated between 30% and 40% of your target. By age 50 you should have 50% to 60% of your target amount. And, at age 60 you should have between 85% to 90% of your savings target.
By starting your retirement savings program early, you can help ensure that you will have the required target amount by the time you actually retire.
Please remember that this retirement savings calculator spreadsheet is only a tool and cannot be any better than the assumptions you make when using it.
Right click on the following link and save the retirement savings calculator spreadsheet to your computer.
How Much Should I Save? Retirement Savings Calculator
You can use Microsoft Excel to load the spreadsheet and enter values in the "Inputs" box. You will see graphical and tabular results that will help you better plan for a successful retirement.
Retirement Savings: Is it Enough?
You need money for your retirement years.
The question is: Are your retirement savings sufficient to provide the needed retirement income?
For most people in the United States there are four places retirees get their retirement money:
- Social Security
- Company pensions
- Savings and investments
- Income from earnings, relatives, or other organizations
Social Security
Many people rely on the government to do the investing for their retirement.
For two-thirds of the elderly, Social Security is their major source of income. For a third of the elderly, Social Security is virtually their only income.
Social Security is now taking in more money than it pays out in benefits, and the remaining money goes to the program’s trust funds.
Of course, the problem with the "trust funds" is that all they contain are government bonds and certificates of indebtedness. The excess money you now pay in Social Security taxes is spent by Congress and Congress puts bonds and certificates in a special "lock box" that contains the trust fund. While they may talk about the trillions of dollars in the trust fund, all that's really there are pieces of paper.
Government bonds are merely IOUs indicating that, somehow, the government will raise money in the future to pay the holders of the bonds. In this case, the holder of the bonds is the Social Security trust fund.
So, the government isn't really investing for your retirement. They've already spent the money and promise to spend more later for your Social Security benefits. To pay these benefits the government will have to raise the Social Security taxes on those still working when you retire.
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Under the intermediate assumptions, OASDI cost will increase rapidly
between about 2010 and 2030, due to the retirement of the large baby-boom
generation. After 2030, increases in life expectancy and relatively low fertility
rates will continue to increase Social Security system costs, but more
slowly. Annual cost will exceed tax income starting in 2017...
The OASDI annual cost rate is projected to increase from 11.13 percent of
taxable payroll in 2005, to 16.74 percent in 2030, and to 19.08 percent in
2079...
The primary reason that the estimated OASDI cost rate increases rapidly
after 2010 is that the number of beneficiaries is projected to increase more
rapidly than the number of covered workers. This occurs because the relatively
large number of persons born during the baby-boom will reach retirement
age, and begin to receive benefits, while the relatively small number of
persons born during the subsequent period of low fertility rates will comprise
the labor force.
THE 2005 ANNUAL REPORT OF THE BOARD OF
TRUSTEES OF THE FEDERAL OLD-AGE AND
SURVIVORS INSURANCE AND DISABILITY
INSURANCE TRUST FUNDS
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This simply means that, if the benefits remain as promised, the tax rate required to pay for those benefits will increase.
The reason is simple. There will be more retirees than ever before while the number of workers paying for the benefits will not increase rapidly enough to keep pace. Because there will fewer workers per retiree, workers will need to pay more to support the baby-boom generation.
So, benefits will become increasingly political in the future. If workers will not allow their Social Security taxes to nearly double, the benefits will have to be reduced.
Company Pensions
About half of households are covered by some type of employer provided pension plan. If you are promised a company pension and your pension fund is properly funded, you can look forward to a stream of income in your retirement years.
Many companies are attempting to save money by switching their "defined benefit" plans to "defined contribution" plans.
Defined benefits plans promise specific payments, often based on age and number of years of service. The company must contribute to the plan an amount that will be sufficient to pay the promised benefits.
Defined contribution plans promise only that the company will contribute some defined amount to your plan during your working years. Each worker has a separate account. The retirement income you finally receive depends on the total amount in the plan; this is the amount contributed to the plan and how successfully those contributions were invested.
The Pension Benefit Guaranty Corporation indicates that:
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There have been some major shifts recently in America’s pension system. While the number of workers covered by traditional defined benefit pensions has remained relatively level, there has been significant growth in defined contribution pension plans, especially 401(k) plans. Many employers began offering workers both a defined benefit plan and a 401(k) plan. Other employers offer only 401(k) plans.
A PREDICTABLE, SECURE PENSION FOR LIFE
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Defined benefit plans are clearly easier to understand. If you have a defined contribution plan, however, you should take the effort to fully understand your contribution and investment options. This will help you understand how to maximize your retirement benefits.
Savings and Investments
Many people hope to be able to budget money for long term savings. But, too many have difficulty actually finding extra money to invest for their future.
One cause is an increase in consumer spending, as Alan Greenspan, former Chairman of the Federal Reserve Board indicated:
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The sizable gains in consumer spending of recent years have been accompanied by a drop in the personal saving rate to an average of only 1 percent over 2004--a very low figure relative to the nearly 7 percent rate averaged over the previous three decades.
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The discipline to save is being overcome by the desire to have the good things in life now.
The Congressional Budget Office cites two studies that recommend savings rates for American households:
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Two studies published in 2000 compared households' actual saving rates with the rates recommended by popular software packages. One study, by Mark Warshawsky and John Ameriks, applied the Quicken Financial Planner program to data from an extensive set of survey respondents between the ages of 25 and 71, taking into account college expenses for dependents, housing wealth, expected retirement age, life expectancy, future Social Security and pension benefits, and a postretirement drop in living expenses. That study found that under the authors' assumptions about future incomes and rates of return, about half of those households were on track to fully finance their retirement. The other half, however, were likely to run out of assets--15 percent were expected to reach retirement with no financial assets; 20 percent would run out of assets within a decade of retiring; another 10 percent within 20 years; and another 5 percent within 30 years. The study concluded that, on average, households would be able to fund 24 years of retirement, but the half who were not fully prepared would face an average of 19 years of unfunded living expenses, amounting to $300,000 (in 1992 dollars).
A similar study by Douglas Bernheim and coauthors in 2000 used the ESPlanner software package to calculate saving rates that would allow a sample of preboomer households to maintain a constant level of consumer spending for the rest of their lives, given their expected earnings and intended retirement age. That software recommended very little saving for households in the bottom 15 percent or so of the income distribution, whose working-age income would be largely replaced by Social Security. For households with income of more than $15,000 per year, its median recommended saving rates ranged from 13 percent to 23 percent (depending on the households' current age and planned retirement age)--higher than those households' actual average rates of saving. Under the assumption that Social Security benefits will be cut in the future to bring the Social Security system into long-term balance, the program recommended even higher saving rates.
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So, what is the average saving rate among US households? It is much smaller than recommended and growing smaller all the time.
For at least half the households, saving rates are inadequate to fund a comfortable retirement.
You should carefully examine your plan for retirement saving. Look at your personal saving plan, your employer pension (if you have one) and the potential for reduced Social Security benefits.
If you have not consulted with a financial planner, you should determine what your optimal saving plan should be. Your future is in your hands.
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