The best calculator for planning retirement and determining your savings and income needs is a retirement budget spreadsheet to be filled in with your own unique list of categories. A simple retirement spreadsheet like this drills down to your specific needs and gives you a more targeted view of what your total savings should be.
Using a spreadsheet, you create categories for your specific spending habits and expenses. From there you can create additional columns for brainstorming various scenarios such as reducing spending in certain areas and increasing others.
For example, at the start of your retirement, you may be finishing up a car loan or small mortgage.
After that you will have spare cash to spend on hobbies or travel.
After you have planned your budget and added some buffer, you will see what you need for income to cover the expenses and spending budget.
Using that number as a guide you can use other tools to figure out how much money you should have to support it.
To be conservative you can simply do the math to see how much cash you need per year and estimate how many years you need it.
Look for the "Personal Budget Spreadsheet" link. There may be other useful spreadsheets you can use on this site, too.
Enter all your spending categories and fill in your specific spending habits. When you first begin you won't remember everything, so you'll be going back several to many times to tweak it, adding new information and fine-tuning others.
You can find more information on using the spreadsheet on the detailed planning page.
At some point you will have something fairly consistent to work with, and you can start focusing on the total budget numbers.
So if your total expenses are around $3000 per month, the annual amount will be $36,000. For 20 years that will cost $720,000.
Since we haven’t considered gains from investments, the actual cash value needed at the beginning of your retirement could be less. And we haven’t factored in Social Security, either.
Other numbers to consider include your life expectancy from the age you plan to retire, the number of years you want to provide for before Social Security starts, and so on.
You may want to consult actuarial tables that are commonly used in the insurance industry to determine typical life expectancy for your age.
According to the 2007 table at ssa.gov website, a 55 year old female has a life expectancy of 28 years. These are the same tables typically used for estimating annuity benefits.
Source for table below: ssa.gov
Using that 55 year old female who plans to retire early as an example, there will be 11 years without Social Security at $3000 per month, or $36,000 per year, for a total of around $400,000.
Then there will be 17 years where Social Security contributes $408,000 and the amount of savings needed to cover the gap is only $204,000.
For this scenario, the savings needed for 28 years at $3000 per month is $600,000. This is without the gains typically expected from investments. Which means this money could sit in a savings account and safely support her income needs for the 28 years.
But it would not provide for unforeseen problems like an extended illness requiring skilled nursing care, for example.
Invested, this amount of savings could continue to grow and provide more than just living expenses. How much it would provide depends on investment returns.
With typical investment returns in a well diversified portfolio, the investment returns could provide a significant portion of the income needed. That would leave more money in the account to generate more income for later, and it would be there to cover those unforeseen problems.
So this could be a reasonable savings target that could be tested against other financial tools.
A conservative approach, such as an annuity could provide modest returns. A more aggressive approach such as stocks and bonds could provide significantly more. It depends on your tolerance for the ups and downs of the stock market. Factor in slightly more risk, and the income could be higher.
So risk tolerance and investment preferences needs to be factored into the full picture to determine whether your calculated number will be good for you.
A retirement income calculator that tells you how much income to expect based on a savings rate and a rate of return over time is really just a math exercise. How reliable is that rate of return you plug into it? Not reliable unless you use fixed investments, like a pension or annuity.
Obviously, the example above is not going to fit everyone.
The Social Security amount depends on the individual’s work history.
The budget amount depends on lifestyle, whether there is pre-existing debt, etc.
This is why each person or couple needs to do this exercise for their particular circumstance.
Some people may need to save a chunk of money to start their dream business or buy their dream home, on top of their living expenses.
Others may have extra income that provides additional money on top of living expenses so they will be able to indulge their families, travel extravagantly, or just have plenty of extra cash on hand for splurging whenever they want.
Be sure to use the spreadsheet calculator for planning retirement income now and then to validate your plans.