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Wednesday, September 5, 2012

A Retirement Calculator for Retirees

If you've looked online for a retirement calculator, you know that most online retirement calculators don't work well for retirees.  If you input a current age greater than desired retirement age, for most you get an error message.  This isn't true for the T. Rowe Price calculator. Thus, this calculator is useful for retirees and, if you are younger, is a perfect tool to get the sometimes awkward conversation rolling to check on your retired parents - "hey dad, did you know there is this neat online, free, calculator that will...."

This calculator only takes a short time but gives you an idea on whether you are on the right track in retirement.  That is, it answers the most worrisome question on the minds of many retirees - whether they are likely to run out of money.

Before beginning, read the T. Rowe Price disclosure.  The calculator provides estimates of future actions under uncertain conditions.  As such, it should be viewed as a guide.  Their disclosure is at the bottom of the first page at the link below.

To begin, go to T. Rowe Calculator and click the orange "Start" button to get :

Source: T. Rowe Price

CLICK IMAGE TO ENLARGE   Fill in as indicated (Harvey, if you're reading this, you're supposed to fill in the date you were born not the date I filled in!).  Notice that it asks explicitly if you are "Living in Retirement." Other calculators tend not to have this feature!

Click orange "Next" button:

Source: T. Rowe Price

CLICK IMAGE TO ENLARGE   Here you only have to fill in two amounts.  Note that there is a worksheet that will refine the analysis.  On the worksheet, you break out the amounts you have in qualified accounts from the taxable accounts.  This is a big distinction!  When you withdraw from the qualified accounts, such as an IRA, you have to pay taxes (federal and, in most states, state tax).  You also have RMDs from your qualified accounts (except for Roths) in your 70s.

Click "Next" to go to the "Asset Allocation."

Source: T. Rowe Price

Asset allocation is just about the percentage you have invested in stocks, bonds, and fixed income.  Two important points:  investment performance depends greatly on asset allocation, and most individuals should increase their exposure to bonds as they get older to reduce the volatility of their performance.

As you can see, there are two choices.  The first lets you pick your allocation by using the sliders, and the second automatically changes your allocation as you age.

Click "Next Living in Retirement."

Source: T. Rowe Price
Note that you have worksheets here.  Check them out.  If you are receiving a pension, work part-time, or own real estate etc., you'll want to put that in a worksheet.

If you need to check how much you'll be getting from Social Security, read this Post:  "The First Thing You Need to Know About Retirement."

Click "Next Your Results."  You'll see that the model runs a number of simulations.  It will show how much you want to spend and how much it believes you can spend and have a 90% chance of not running out of money before the age of 95.  You'll also see that there are a number of inputs you can change to see the impact on your results.

If you have never done this type of exercise, it can definitely be eye-opening.  There are a few things, though, to know about this exercise in general.  For example, you should redo it regularly - at least every 2 years.  Also, there are a lot of unknowns including life expectancy, market performance, and general life events.  This observation tends to escape a lot of people, including financial planners.  They tend to think there is some magic number that, once reached, retirement is a done deal.  Instead, as mentioned above, revisit your situation on an ongoing basis (and especially when there are major events in your life).

Do this and you will get a lot of value out of this exercise.

1 comment:

  1. I agree this exercise can be eye opening. It can kill any desire for lifestyle inflation or make you even more skeptical (suppose it is wrong by 1% (that can be big :-). It is healthy, and I really think just about everyone should do it.