Calculating Retirement Savings Targets
This calculator is designed to provide the user with a view of the income and assets required to achieve their retirement income target. The calculation requires a total of ten inputs:
- The user’s current age, their target retirement age, and a guess at their life expectancy
- The user’s current household income (gross income), the annual rate of income growth, and how much income to replace, once retired
- The assets earmarked for retirement
- Any income received in retirement, typically from an employer sponsored plan such as a pension
- Any income from a government sponsored source, such as Social Security in the United States
Using this information, the calculator then provides the user with the following:
- A projection of their household income when retirement age is reached
- The targeted income in retirement, based on the projection of household income
- The total of all other income, which includes the employer sponsored and government sponsored plans
- Their retirement income gap (if any)
- The total assets needed to fill the identified income gap
- The future value of the previously identified retirement assets
- Their retirement asset gap (if any)
- Finally, the annual savings required, starting with the current age until retirement age is reached
Retirement Income and Savings
Most of us don’t want to work forever and even look forward to the day we can escape from the daily grind. In fact, having a sufficient source of retirement income is important for a number of reasons. To start, it’s important to have sufficient income to cover daily living expenses. Retirement is usually accompanied by a reduction in income and having a reliable source will ensure those daily living expenses are covered. You also want to be able to enjoy retirement, and reward yourself for the years of hard work that’s now behind you. So, maintaining a comfortable lifestyle is a second reason to put money away.
Unfortunately, unexpected expenses can arise in retirement too. Healthcare costs are expensive as are certain home repairs. You’ll want to have a source of income to ensure you don’t have to reach too deeply into your savings. Avoiding financial stress is yet another good reason to save, since it can have a negative impact on your health. Finally, you may want to leave some money behind for loved ones or a favorite charity.
Interpreting the Results of Our Calculator
The results of this calculator are split into three sections. The first section focuses on income. The calculator forecasts how much money you will be making when you reach retirement age and how much you’ll need, once retired. It then subtracts any source of retirement income you’ve identified and determines if there is an income gap.
The second section of the calculator provides a forecast of the assets needed to close the income gap. From this value we subtract the existing retirement assets, which grew at the return-on-investment rate specified earlier. This allows us to quantify the retirement asset gap. The final section provides the annual savings needed (starting at the current age and ending with the retirement age) that are needed to close the asset gap.