I’m trying something new this week. I built a calculator just for you. It’s meant to help with your retirement planning and look at the next baby step on your retirement path. The calculator asks you some basic information—your age, future retirement details, whether you’re conservative or optimistic about investments—and then calculates a suggested retirement savings goal for 2021.
I know New Years is more than a month away. But it can’t hurt to start thinking about 2021’s resolutions today. Saving money can be one of those resolutions, and retirement is a great thing the save for.
But a retirement savings goal is a difficult number to quantify. What if you retire at 60? At 55? At 50? What if your investments do well? Do poorly? What if they’re somewhere in between? You certainly don’t want to run out of money, so how should you account for that? This calculator answers all these questions.
There are lots of moving pieces in retirement planning. This calculator isn’t a cure-all, but it does simplify some complex math. It boils all the inputs down into one simple output: how much should you save next year to keep you on your retirement path?
And don’t worry—I explain all of my assumptions towards the end of the post.
Go ahead—give it a shot!
There it is! The field above shows your calculated retirement savings goal for 2021. This is the amount of cash the Best Interest recommends you should put into long-term investments. If you follow this advice year after year, you’re likely to achieve your retirement goals.
Below you’ll find a few different ideas: a FAQ, some Things to Try, and a list of Assumptions.
As always, let me know if you have any questions.
Retirement Savings Goal FAQ
As you ask more questions, I’ll update the FAQ below.
“What Should I Do With the Money I Save?”
I’m happy to tell you how I invest. That’s what I’ll be doing with my retirement savings in 2021.
“I Think the Calculator is Broken…”
I did not test this calculator like a software company would, so I admit that some inputs might “break” the calculator or lead to strange results.
My first recommendation: make sure you use “realistic” inputs. I tested a bunch of realistic scenarios, and they all ended up working as expected. But I didn’t try every possible combination. If you say you’re 50 years old and want to retire at 40, then you need a time machine, not a blog calculator.
That said, if you’re being realistic and you still think it’s broken, let me know.
“My Retirement Savings Goal Seems Really High…”
First, I recommend you read the next section. Most of us will have supplemental income in retirement (e.g. social security), and the next section describes how you should incorporate that into the calculator. It’ll lower next year’s retirement savings goal.
After that, there’s a stark realization here. Retirement is expensive! If you hope to retire soon, live a rich retirement, and/or have a long retirement, then you’ve got to save a lot of money.
There’s a reason why your younger years are so important for investing.
“How Should I Consider Supplemental Income in Retirement?”
There are dozens of ways you might supplement your income in retirement. Common examples include Social Security and pensions. The lotto doesn’t count.
If you fall into one of these camps, I recommend re-running the analysis after reducing your “Annual Spending in Retirement.” Let’s work through an example.
The calculator is pre-set to assume $36,000 in annual spending. The average Social Security pay-out in 2020 is about $1500 per month, or $18,000 per year. Therefore, I’d recommend adjusting the calculator’s “Annual Spending in Retirement” to $18,000 ($36k – $18k = $18k).
“Why Is My Retirement Savings Goal NEGATIVE?!“
There are a few simple explanations why your savings goal might be negative.
The first and most common: you already have enough money saved for retirement! This is really good. This especially applies if you’ve been diligently saving for years and plan a low-cost retirement.
If you doubt you already have enough saved, go back and check your calculator inputs.
If you’ve checked your inputs and something still seems wrong, let me know.
“I Have NO IDEA What My Spending in Retirement Will Be. Help!”
Fair enough. It’s hard to predict what you’ll spend in retirement.
My recommendation: start with what you spend right now. And if you don’t know what you spend right now, that’s your sign that you should start budgeting.
Once you know how much you spend right now, take your largest expenses and scale them for retirement. Here’s my personal example of simple scaling:
- Housing – I expect this to decrease, since I’ll have my mortgage paid off when I retire. (-$900) per month.
- Kids – I don’t have any now, and I also plan that I won’t have any who I’m actively supporting when I’m retired. No change in this category.
- Automotive – about the same.
- Food, consumer good, etc. – about the same.
- Medical – to be safe, I’m going to increase this number. Based on some quick research, +$500 per month.
- Fun stuff – I think I’ll do a bit more fun stuff in retirement. For now, I’ll allocated +$200 per month to fun.
That’s it. This brief, simple scaling suggests I’ll spend about $200 less in retirement than I’m spending now.
But Jesse—by the time you retire, won’t the Best Interest be pulling in millions of dollars due to its amazing ability combine financial education with entertainment?!
Maybe, but I’m playing it safe for now.
“Should I Include Taxes?”
Most likely! Let me give you my personal example. About 75% of my current retirement savings lie in accounts that will get taxed upon withdrawal in retirement.
So if I need $40K for my actual spending, I’ll probably need to withdraw between $45K and $50K—the extra goes to income tax and capital gains tax. As such, I should input that $45 – $50K value into the Annual Spending on the calculator.
“Is My ‘Current Long-Term Investments’ Just My Net Worth?”
Not quite. Net worth includes many assets and liabilities that should not be considered long-term investments.
Your emergency fund is part of net worth, but it’s not growing like an investment. Your house might be a long-term asset, but you likely won’t be selling it in order to retire. And you debts count against your net worth, yet don’t count against your long-term assets. You can simultaneously save for retirement and pay down your debt.
“But This is Just One Year…”
That’s true. If you want to look further into the future, I recommend this article from Financial Freedom Countdown that answers the question, “When can I retire?”
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Things to Try in the Retirement Savings Goal Calculator
Here are some cool ideas I recommend you try with the calculator. Keep two things in mind as you play around. The first is to investigate how changes in your life today can affect your long-term goals. The second is to realize that certain things—like market performance—are out of your hands, yet can still affect you.
1) Play With the Optimism/Pessimism Slider
Market performance plays a huge role in the retirement savings goal calculator. It controls both how your nest egg with grow leading up to retirement and how your nest egg will shrink as you withdraw in retirement.
If you’re too optimistic, you might not save enough. If you’re too pessimistic, you might end up saving more than you’ll ever need—and thus work longer than you need to.
I recommend you play around with the slider to understand the range of recommended savings goals. If you can, set the bar high and aim for a conservatively large savings goal in 2021. As the years go by, you can always reevaluate.
2) Give Yourself Some Extra Years
We don’t often get to play God, so take this chance to tack on extra years at the end of your life. Running out of money in retirement is not ideal, so this exercise will give you some buffer years at the end of your life—and will increase your 2021 retirement savings goal accordingly.
3) Go Fat, Go Lean
Take your 2021 savings goal—let’s say it’s $10,000.
Now we’re going to try to re-create that $10,000 result in two separate ways.
First, try to decrease your Annual Spending by 50% while also decreasing your retirement age. Tweak your retirement age until your recommended 2021 retirement savings goal ends up around $10K again. This gives you a rough idea of how quickly you could achieve a “lean” retirement. You’d be leading a spartan lifestyle, but retirement could be closer than you think.
Second, try to increase your Annual Spending by 50% while also increasing your retirement age. Again, tweak your retirement age until the calculator recommends saving $10,000 in 2021. This gives you an idea of how much more time you’d need to work in order to eventually live a “fatter” retirement. You could afford a lot more—-but at what cost? It’ll likely lead to many more years of work.
When I try this exercise, I get the following:
- My normal input –> retire at 55
- Lean = 50% less retirement income –> retire at 43
- Fat = 50% more retirement income –> retire at 63
I’m not sure when I want to retire. But the spectrum of potential retirement lifestyles necessitate a spectrum of career lengths and savings.
The entire “FIRE” movement is based on these spectra of retirement lifestyles and career lengths.
Assumptions in the Calculator
An analysis is only as good as its assumptions. If I assume that I can run at 60mph, then my path to become a world-record holder is paved with gold. Usain Bolt, I’m coming. Bad assumptions = bad answers.
So here are some of the most important assumptions from today’s retirement savings goal calculator.
I assumed 2.5% inflation per year. That applies to every year in the calculator. It affects how your current 2020 spending gets multiplied to reach a future nest egg goal. This is as good an assumption as one can make based on historical inflation rates.
Portfolio Makeup and Performance
Like the original Trinity Study, I assumed that your portfolio would comprise a 50/50 mix of stocks and bonds. Important note! Many portfolios—especially if you’re young—will leaning much heavier into stocks than bonds. This makes your portfolio riskier, but also is more likely to lead to better long-term returns. This is why I recommend you toggle to Optimism/Pessimism slider.
But let’s go back to the 50/50 portfolio. The Optimism/Pessimism slider affects the stocks’ simulated performance, varying between 1.9% growth per year and 11.1% growth per year. These numbers represent the worst 30-year annual return and best 30-year annual return in S&P 500 history, respectively. The bonds were assumed to return a steady 5% per year.
If you’re interested in the market’s past (and potential future) performance, this decade-by-decade comparison is a good starting place.
So when the slider is set at 0, the stock portion returns 1.9% and the bond portion returns 5%. The net result is a 3.45% return. When the slider is set at 10, the stock portion returns 11.1% and the bond portion still returns 5%, leading to a net 8.05% return.
Each increase of 1 on the slider will increase your annual portfolio return by about 0.5%.
This is way too coarse for some people. For a future iteration, I’d like to add functionality where you can choose your own stock/bond allocation. If you’d be interested in something more, let me know.
“The 4% Rule”
The 4% Rule is a brief nickname for the outcome of the famous Trinity Study. The rule states that…
- if you’re planning a 30-year retirement
- and if your portfolio is 50/50 stocks and bonds
- and you want to be 95% confident in your retirement planning
Then you can withdraw 4% of your nest egg in Year 1 of your retirement, and then increase that withdrawal in each subsequent year to account for inflation. This makes your nest egg target easy to calculate—it’s your annual spending divided by 4%, which is equivalent to your annual spending multiplied by 25.
If you want more conservativism or if your retirement will last longer than 30 years, then you’ll want a “lower” rule (e.g. 3.5%). This increases what your target nest egg would
If you want to be more optimistic about your investments, or if your planned retirement is shorter than 30 years, then you’ll want a “higher” rule (e.g. 5%).
For this calculator, I used your input of “optimism or pessimism” to scale this “rule” between 3.5% (pessimistic) and 4.5% (optimistic). Then I scaled that number using your planned retirement length. Longer retirements scale the number down, shorter retirements scale the number up.
Clear the Memory
Thanks for giving the calculator a try. It’s my first attempt. If you didn’t get the memo earlier, I’d love to get feedback.
I hope you find it helpful. A retirement savings goal is something to think about every year. So why not start in 2021?