Retirement Calculators Lead to More Questions

Investors need to make a variety of guesses to get a retirement savings estimate.

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If you are within a few years of retirement it may be possible to determine your retirement needs with a fair amount of certainty. Simply find a retirement calculator, plug in a few variables, and you should have a reasonable estimate. But if you are more than a decade away from retirement, the same retirement calculator seems to raise more questions than answers. How can you accurately estimate your retirement needs when you have to make a variety of assumptions just to get an estimate?

[See 10 Essential Sources of Retirement Income.]

The truth is you can’t get an exact number right now. But that doesn't mean you can't make an educated guess. A rough estimate when you are mid-career or earlier should be enough to get you started. Here are the variables used by many retirement calculators that you will need to input to get a rough idea of how much you need to save each year to reach your retirement goals.

1. Current age, expected retirement age, and life expectancy. This information covers two major variables: How long you have to save before you retire and how long your nest egg will need to last. As you might expect, the earlier you retire, the more money you will need in retirement.

2. Current income. Your current income is used by some retirement calculators to determine factors such as your tax rate, future Social Security benefits, and how much you should contribute to your retirement accounts each year as a percentage of your income.

[See 5 Characteristics of a Good 401(k) Plan.]

3. Desired retirement income. Most retirement calculators want to know how much money you will need each year, usually expressed as a percentage of your current income. A commonly used expectation is 80 percent of your present income, but your needs will vary based on your circumstances. This is used to determine how much of your nest egg you will withdraw each year.

4. Your current savings. This one is easy. Simply add up the values of your retirement funds such as your 401(k), IRA, and other long-term investments. You also need to account for any taxable investments if they will be used for retirement. The earlier you start saving for retirement, the longer you will have for compound interest to work its magic, and the greater your chances of reaching your retirement goals.

5. Other sources of retirement income. This can include your Social Security benefits, a pension plan if you are eligible, part-time work, rental income, and investment income. Keep in mind that you can increase your Social Security benefits if you wait longer to begin receiving benefits. To estimate your benefit, visit

6. Your expected rate of return. Most calculators default to investment returns of 7 or 8 percent annually, which is a reasonable expectation based on historic returns.

7. The anticipated inflation rate. An inflation rate of 3 to 4 percent is a reasonable expectation based on historic numbers.

[See 4 Things You Need to Know About Your 401(k).]

Calculate your estimate. Depending on which calculator you use, you are probably entering 10 or more variables, many of which are guesses. At this point the best thing you can do is enter an educated guess and take the opportunity to play around with the results. Try an earlier retirement age or increasing or decreasing your investment returns. Adjust the inflation rate to see how that affects your retirement numbers. You will probably see that even very small changes can have a dramatic impact on your bottom line.

If you are still more than a decade away from retirement, the best you can do is work with the information you have available to you at the moment. Get an estimate of how much you need to be saving and adjust as you go. You will have ample opportunity to fine tune your retirement portfolio as you get closer to retirement.

Ryan Guina is a U.S. military veteran, writer, and professional in the corporate world. He blogs at Cash Money Life and The Military Wallet.