Have Some Fun With Retirement Income Calculators

If you’re wondering if you’ve saved enough for your approaching retirement, you might have looked at a few online calculators.  Major financial institutions offer retirement calculators but there are many others.

Most people are looking for answers to either A) verifying that they are saving enough, or B) if, or when they can retire.

Retirement calculators can answer one or both of these questions. But not all calculators are created equal.

Many retirement calculators only deal with retirement savings to help you determine “your number.”  They  don’t account for any pension income, Canada Pension Plan and Old Age Security payments, or taxes.  They don’t include those unknown variables such as how long you will live, stock market returns and the rate of inflation.

Here are some good free online options for you to try:

  1. The Canadian Retirement Income Calculator is brought to you by the federal government.  It’s quite comprehensive, easy to use and effective in showing any gaps between the income you want and what your current retirement resources will give you.  It asks you to put in your RRSP and TFSA details and specific CPP figures from your Statement of Contributions.  You select your life expectancy date rather than defaulting to the average.  One drawback is it doesn’t account for taxes.  It’s a good place to start, however.
  • Try this Retirement Cash Flow Calculator from Get Smarter About Money which is funded by the Ontario Securities Commission.  It helps you plan your cash flow in retirement based on your income and expenses and will tell you how long your money will last.
  • The Personal Enhanced Retirement Calculator by former actuary and author of Retirement Income for Life:  Getting More Without Saving More – Fred Vettese. Answer a few questions and it will show you how much you can spend in retirement.  It shows how you can improve your situation by taking CPP at age 70 instead of the usual 65 or earlier.  One good feature is that you can include your spouse in the calculations.
  •  Money Pages Smart Planner gives a detailed look at your financial future.  It stress tests your retirement plan to see how well it can withstand a market crash.  You can also add your spouse.
  • Although this is meant for Americans, you can use the Vanguard Nest Egg Calculator in conjunction with your Service Canada’s CPP calculator.  It will run 5000 historical market scenarios and give you the probability of your nest egg lasting your lifetime, no matter what the markets do.

Things to remember about web-based calculators

It’s easy to put in the facts – your age, how much you have saved – but then come the educated guesses.  You don’t know the long term inflation rate, rate of return, how long your retirement is going to be and if you’ll have large unexpected expenses down the road (I’m thinking here of long-term care, for example). 

We can’t predict these and we have no control over them.

Be careful with the assumptions you use for investment returns and inflation.  You’ll be tempted to get encouraging totals by increasing the rate of return and decreasing the rate of inflation (If my portfolio earn 15% net of fees and inflation is 1% for the next 30 years I can retire tomorrow.) 

You can dream but it’s better to be conservative.  By default, a reasonable number for inflation is 2% or 3%, the lowest rate of return on a balanced portfolio is 5%, and plan for age 95 or even 100 for longevity.  Assume that you’ll live a busy, active (and therefore more expensive) retirement.

Related:  Determining Your Retirement Income

Remember,  retirement calculators are useful only to model the future, not predict it.

Different calculators yield different savings amounts because of unknown algorithms that are used in their calculations.  They also assume the same rate of return every year when, in reality, we know that investment returns fluctuate from year to year.

Some calculators give very unrealistic results.  One I recently came across came up with a horrifying savings rate of $3,600 per month to provide me with an annual retirement withdrawal rate of $40,000.

The bottom line

The definitive retirement planning question is not how much have you saved – it’s how much income you can expect to receive each year once you’ve left your employment. You also want to know how long that money will last.

Related:  Countdown to Retirement

Online calculators are a good place to start.  But remember, they are only as good as the information you put in them and the underlying assumptions of the calculator itself.

If you have multiple streams of income, are self employed, or otherwise have a complicated situation, I encourage you to consult a financial planner to test your retirement readiness – one that will crunch the numbers for you and not try to sell you their investment products.

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