After my rant about how dumb it is to base your retirement needs on your income rather than your spending, you might guess that I hate most online retirement calculators. You are correct.
The vast majority of online retirement calculators use your current income to compute how much you need to save for retirement. It’s dumb when financial advisers do this, and it’s even dumber when automated programs do it. Retirement calculators tend to be dumb in lots of other ways too.
Look at this example from a CNN, for instance:
Really? Really? “Monthly savings amount should be at most 40% of your monthly income?” Yet another example of how the Real World just doesn’t deal well with early retirement and financial independence. (All of the CNN retirement calculators are terrible. I found one that wouldn’t allow a retirement age of less than 50 or a saving rate of over 25%. Plus it calculated that a $1.6 million nest egg would allow $95,000 year of spending if you retired at 50. Absurd!)
Fortunately, there are a handful of retirement calculators out there that take different approaches. Let’s look at a few of the best calculators I’ve been able to find.
- If you like detail, then cFIREsim is for you! This crowdsourced (and Open Source) retirement simulator allows you to enter tons of different parameters. New or casual users might find it overwhelming, but because of its depth it offers accurate and realistic results.
- FIRECalc 3.0 uses a similar methodology to cFIREsim but requires far less input. You tell the calculator how much you have saved, how much you plan to spend each year, and how many years you plan to be retired. FIRECalc compares these numbers to every U.S. stock market since 1871 to determine whether your money would have lasted. Quick and easy but far more sensible than trying to guess how much you need in retirement based on your current income.
- If you’re still in wealth accumulation mode, the When can I retire? calculator from Networthify is a great tool for estimating how soon you’ll reach financial independence. It’s not nearly as useful if you’ve already achieved FI, however. (By this I mean it doesn’t show how long your savings will last if you’ve already retired.)
- The excellent retirement income calculator from T. Rowe Price bases its results on your spending needs. You supply your current savings and salary, specify an asset allocation, then tell the calculator when you expect to retire and how much you anticipate spending. The program runs “1000 market simulations” to determine how much money you’ll need, then compares that with how much you’re expected to have.
- Bankrate’s retirement income calculator bases its numbers solely on your savings. I like the notion behind this calculator, but I question the results. They seem high. (See below for more info.)
- Finally, there’s the rule of thumb I use frequently here at Money Boss. This isn’t an online tool, but a quick calculation you can run to get a rough idea of where you are with your retirement saving. It works like this: Divide your net worth by 25. This is the annual spending your current nest egg will support long-term. (If you’re risk-averse, divide by 30. If you’re aggressive, divide by 20.) So, if you have $1,000,000 saved, my rule of thumb says you can spend $40,000 per year — or about $3333 per month. (That’s $2778 per month if you’re risk-averse, or $4167 per month if you’re bold.)
Looking at the results from just one retirement calculator isn’t very useful. But if you compare the numbers and recommendations from several, you can get a pretty good idea of how much you’ll need to save for the retirement you want.
If I run the numbers for my own situation using each of these methods, I get the following results:
- cFIREsim says that, based on past U.S. market history, I am 100% safe to spend $47,291 per year (or $3941 per month).
- With FIRECalc, I had to run the numbers several times to find the lowest level of annual spending that would have lasted forty years 100% of the time. It’s $46,750 (or $3896 per month).
- T. Rowe Price says I can afford to spend $3820 per month — more once Social Security kicks in.
- Networthify doesn’t give me any useful info. It’s meant for folks who have not yet achieved financial independence.
- Bankrate says I’m able to spend $6014 per month. WTF, Bankrate? Why are your numbers so far off from everybody else?
- My own rule of thumb says I have $4667 per month available — $3889 if I want to play it safe. (I’m not willing to make aggressive assumptions with my retirement savings.)
It seems pretty clear that I can safely spend nearly $4000 per month for the next forty years and I won’t run out of money. If I’m willing to take a chance and/or supplement my income, I can probably bump that to $5000 or $6000 per month. Since my normal burn rate (when I’m not traveling the U.S. in an RV) is about $3000 per month, I should be fine.
Do you have a favorite retirement calculator that I’ve missed? Please share it in the comments!
Footnote: My pal Todd at Financial Mentor has commissioned a variety of terrific financial calculators, including a few focused on retirement. Because he offers so many different tools, there’s bound to be one that works for you. (If you’re already retired, for instance, the retirement withdrawal calculator might be handy.)