The purpose of every retirement calculator is to show you one or both of these two types of data:
1. the amount you need to save monthly to afford to retire or
2. how large of a portfolio you must have to allow you to retire

The retirement calculator does these calculations by accounting for the retirement assets you already have:

* savings in a retirement plan such as 401k plan or IRA
* monthly income you will get from a pension or from social security or retirement deferred compensation program
* non-retirement assets that you own: equities, debt instruments, mutual funds, notes, etc
* equity in your dwelling that you may have available should you desire to trade down and release equity for investment funds or take a reverse mortgage

The retirement calculator also accounts for the age at which you want to retire and your forecasted life expectancy. While it may seem like the biggest factor is the financial resources you bring into your retirement that will affect your retirement ease, it is actually not these financial aspects. The biggest influencers of your retirement success are your retirement age and the quantity of years you spend in retirement. Therefore, when employing a retirement calculator, we propose you play the scenario many times using several life expectancy estimations and also see what happens when you test your retirement age from say age 64 to age 66. You may be shocked at the difference you see.

The most superior retirement calculators are commonly NOT those encountered on-line. The best ones are software that you pay for (not very expensive) as they provide for much more sophisticated results. For example, while the free online retirement calculator will offer you an forecast of the sum you need to save or the nest egg you need to meet your retirement income desires, the purchased retirement calculators often use Monte Carlo simulations to account for a variety of future scenarios. Different from the free online retirement calculator that generates ONE average outcome, Monte Carlo calculations produce a range of possible outcomes with their probabilities. You can thus experience the chance of a specific scenario happening.

Note that any retirement calculator has failings because it must rely on presumptions such as:

1. Expected annual returns for the asset classes you select (e.g. stocks, bonds, etc). Some retirement calculators ask you for these estimates while others have implicit assumptions. Either way, if the forecast is that equities generate a 10 percent return over the next thirty years and they generate an 8% return, your retirement finances may not go as planned.

2. Anticipated suppositions about asset type volatility and correlations with other classes may not go as assumed. For example, even if stocks are assumed to generate 10% annual returns over your retirement and they do, if the stocks lose 8% for each of the beginning 3 years of your retirement, your retirement objectives will still not be achieved because the pattern of returns has a fundamental impact on your retirement calculations.

3. No individual knows what income tax rates will be. When you make your forecasts, it is best to assume that rates will be higher in the future (how else can the US government close the deficit)?

4. No person knows what the inflation rate will be. Tightly connected to this is the economic value of the US dollar and most retirement calculators do not take that into account. If you plan to travel broad in retirement and the US dollar is worth 20 percent less, then it means your travel costs abroad will cost you 25 percent more. The value of the dollar plus the impact of US inflation are two other uncertainties that a retirement calculator may not provide for or may need to depend on estimates that prove wrong.

Before you come to the decision that using a retirement calculator is a poor use of time, we encourage you to reconsider that decision.

By experiencing the exercise and thinking about the elements and seeing how the individual retirement variables interact, any retirement calculator will give you a much better sense of reality for your retirement objectives.

Author Bio: To win a comfortable retirement, read Bob\’s blog Retirement Age

Category: Finances
Keywords: retirement calculator,retirement age