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Are You Saving Enough for Retirement?

In recent years I have reviewed dozens of interactive online tools designed to help the user determine the appropriate savings rate to retire. After all my reviews, I think I have found the best “no cost” online tool for analyzing your retirement savings status.

For any online calculator to provide value, it is important for the user to have a very good idea of what their annual living expenses will be in retirement. I would advise that before using any retirement calculator one spend some time estimating their living expenses. If you are decades away from retirement, I would consider using your current family after tax take home pay as a rough estimate of retirement living expenses.

The online calculator that I found the most useful is called “FIRECALC 3.0.” FIRECALC is an acronym that stands for “Financial Independence/Retire Early Calculator.” In my opinion it is the best retirement calculator available on the web at no cost.

What makes FIRECALC such a good tool is it takes into account every real life aspect of retirement including:

• Allowing the user to enter their portfolio value, annual desired spending, and the number of retirement years that the funds need to last and assess the probability that the retirement funds will not be exhausted.
• Allowing the user to enter information about their anticipated social security and/or employer pension benefits.
• Allowing the user to enter different portfolio allocations and portfolio expenses,
• Assessing different retirement phase spending models and inflation rates.

But the best feature of this retirement calculator is, after firming up all the financial data listed above, the tool allows the user to “investigate” the impact of the financial data entered. For example:

• Given a certain retirement savings amount and a certain probability of the funds lasting a stipulated number of years, how much can be withdrawn from the retirement savings each year;
• Alternately, given a desired annual withdrawal amount and a certain probability of the funds lasting a certain number of years, what is the necessary nest egg size that you must accumulate;
• Or, given any 3 of the 4 following items; a retirement savings amount, an annual withdrawal amount, a specified number of years the funds should last, and a certain probability of success, you can investigate the impact of different asset allocations or portfolio expenses on the 4th item.

There are several other interesting ways FIRECALC can be used to provide important information that can help you see how certain things affect your retirement such as working longer or selling your house at a future date and using the proceeds to increase your portfolio size.

The FIRECALC model is not complicated, but it is important to understand how the model works to use it correctly. I would advise reading the “How It Works” page very closely before getting into the model itself. This page describes the background of the model in detail. Once you have read this page, you can click on the “The Calculator” tab to go to the calculator starting page.

A few suggestions when using this retirement calculator:

• If you are retiring in your 60s, you should use at least 30 years as the number of years your funds need to last.
• I would use 90% as the minimum probability of success for any scenario,
• On the tab titled “Your Portfolio” do not ignore the data entry field for portfolio investing fees. This is the average for your entire financial portfolio not just your mutual fund expense ratios. This percentage should include any investor advisor fees if you have an advisor.
• On the “Other Income/Spending” tab the tool allows you to enter any future social security or employee pension income in today’s dollars. If you have any government annuity type income whether it is a federal or state employee pension or social security benefits, I would include an amount below your expected benefit to allow for the future changes that are likely to come to these programs.

I used the FIRECALC model for years to guide my savings rate. It is a very valuable tool. If, after entering your personal information, the model says you need to save more money, then I would start saving more money as soon as possible. Or, alternately, you can do what we did and reduce your required living expenses in retirement that can be supported by your nest egg.

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