In March 2015 the N.Y. Times reported: “On average, a typical working family in the anteroom of retirement — headed by somebody 55 to 64 years old — has only about $104,000 in retirement savings, according to the Federal Reserve’s Survey of Consumer Finances.”
Did I get everyone’s attention?
Pensions are mostly thing of the past. Annuities can provide income security, but they’re just another form of savings (and some of us have substantial equity in our home).
So, with those few exceptions, most of us will rely on our retirement savings and Social Security to see us through. Will we have enough? How can we know?
You’ll need to estimate how much you will spend in retirement and how long you’ll be around to spend it. A good place to start might be your current rate of spending and the average life expectancy within your regional demographic.
Now you’re ready to calculate how much savings you’ll need. Fortunately, “there’s an app for that.” Personally, I use two modeling apps. If both apps are in agreement, I have good confidence that I figured things correctly. I did quite a bit of poking around before I settled on the two apps described below. Be careful. Many models come from financial planning and other financial institutions who have a vested interest in scaring you into saving more than you might need and/or reeling you in to their programs.
My favorite is an iOS app called simply “RetirePlan.” It uses a discounted cash flow method (DCF). The developer, Katherine Phillip, says:
“In just a few seconds you can enter your data and assumptions and the graph will update to show you if your plan will work. If you have more time to spend you can enter as much detail as you want to refine your plan.”
Here’s a screenshot of a model case of a 65-year old individual currently socking away $12,000 per year, planning to retire at 70, hoping to live another 25 years on $65,000 per year, with $1 million in savings, no pension, and $2000 per month Social Security. Inflation 2.5%. Also, let’s add a wrinkle to illustrate how future events can affect the plan. Our friend sells her house for $200,000 and starts paying $1200 per month rent five years into retirement.
It looks as though our friend will just squeak by. But if anything goes awry, it’ll be “welcome to Wal-Mart” or “where do you want to go today on Uber.”
I like two things in particular about RetirePlan. The first is ability to test different “what-if” cases and immediately see projected results. The second is the graphic interface. At a glance, I can tell if, at some point the funds available start to get short and when they might recover again in the case of future events such as a home sale or inheritance.
Ultimate Retirement Calculator
Ultimate Retirement Calculator is an online DCF calculator. While it lacks the graphing function, it is easier to adjust annual income and spending for a more realistic picture. RetirePlan also permits the adjustment but it is less convenient.
Both calculators are free.