Let’s go over what you’ll type into the calculator:
- How do you want to live in retirement? This is a biggie. Conventional wisdom has long held that you need less money in retirement than you do in your working life, the idea being that some expenses (work clothes, for example, or commuting, or maybe mortgage payments) go away. But… if you’re not working, are you just sitting around the house? You probably want to get out and do stuff. Better to assume you’ll spend at least as much in retirement as you do during your working years. Heck, maybe you want to assume you’ll spend more—go for it!
- Frugalista: You should aim to have nothing less than 60% of what you currently make but mentally prepare for taking advantage of senior discounts. In all seriousness, stressing that you will live longer than you can afford to is not exactly ideal or relaxing.
- Comfy and Cozy: Aim for 80% of what you are currently making if you want stress-free flexibility. You’ll likely have paid off your debts by the time you retire, so the money you used to allocate to those bills can give you some wiggle room in case of an emergency or the urgent need to splurge.
- Betty White Status: Aim for 100% of what you are making now so that you can live large, whether it’s by covering health-care costs or tackling your bucket list dream of shopping on the Champs-Élysées.
- What do you expect back from your retirement investment? This is a delicate little dance. If you assume too low a return, you are forced to save more, maybe a lot more. That lowers your standard of living in your non-retirement years . . . a.k.a. now. If, however, you assume too high a return, the calculator might say you don’t need to save as much now, but you might end up eating cat food when you’re ninety.So what’s not too crazy and not too conservative? What’s your sweet spot? I’d say no more than 7% to 8%. “Lapin, that’s a 1% difference…is that really a difference at all?” Over thirty or forty years, you betcha it is. For example, invest $10,000 today, just once, at 7% for forty years and you end up with roughly $150,000. Nice. But at 8% you end up with roughly $220,000, or 45% more money. See, you gotta shake your moneymaker just right.
- How much do you need to account for inflation? Let’s assume a 3% rate of inflation, so I would use that for your retirement calculator, too. We need to account for inflation because what you really care about is the value your money will have in retirement. What will our money buy us when we need it? After all, we can’t assume movie tickets will be the, er, $15 they are now (remember when they were $5? That’s inflation). On a bigger scale, one million bucks today will likely buy half as much in twenty-five years. You need to account for that when planning for your golden years so you don’t show up to the retirement party short-changed.
- When will you retire? The calculator will ask you to input the age at which you’d like to retire. The average age is sixty-seven, but different strokes for different folks. Obviously, the longer you work, the more you can save and the less time you have in retirement. You can play around with this number to see what’s feasible. A lot of us would like to retire ASAP, and if you win the lotto or strike it big, that can happen. But for now, don’t be unrealistic about the age at which you can realistically retire.
- What’s your life expectancy? I know, I know—morbid. Sorry, but this is another question your calculator might ask you. Don’t use anything less than ninety-five. One hundred is better. We’re not going to live forever, but we are living longer and longer. Women do, on average, live longer than men. (Our health-care costs also tend to be higher than those of men, which is another reason we need to get our retirement situation in check.)
- Get anything from Social Security? The calculator might also put in a “Social Security assumption.” The Social Security Administration likely sends you a report every year of what you can expect to get if and when you retire, based on your earnings year to year. Type in what you see on your report—but with Social Security always in danger of being eliminated, don’t take it as gospel. You might want to put in a lower number or skip it altogether in your calculations.
Once you’ve put in figures for 1 through 6, the calculator will spit out a number you will need to save to make all your retirement dreams a reality.