Online retirement calculators now make determining an appropriate savings target for your IRA relatively easy. Check your 401(k) or IRA online account for a retirement calculator or use the search words "retirement calculator" in your favorite search engine. By plugging in a few variables, a good retirement calculator will let you know if you're on track to reach your savings goals.
Don't assume that your expenses in retirement will be lower than they are now. Although some expenses, such as mortgage payments or job-related costs, will drop, others are likely to rise. The most common increased expense is health care; increased travel expenses can also impact a retiree's budget. To ensure a conservative result, assume that you'll spend no less in retirement than you do today. A good calculator will account for the effects of inflation over time.
Chances are you already have some money socked away in a 401(k), rollover IRA or other invested assets. Before you work with the retirement calculator, gather all relevant information so that you have a clear picture of the current assets you'll use for retirement savings. This also includes money you've invested in after-tax accounts, and any money you anticipate from an inheritance.
A good retirement calculator will ask you how your assets are invested to calculate likely investment returns over time. It's easy to fudge here, and choose the allocation that offers the highest returns rather than the one that most closely matches your current investments. An honest answer will ensure that your calculation results are realistic.
The "Four Percent Rule" is a financial rule-of-thumb that says you can safely withdraw 4 percent of your portfolio in the first year, increasing the amount by the rate of inflation each subsequent year, and be confident that your portfolio will last at least 30 years. Based on this rule, work backward to calculate the amount you would need to retire in today's dollars by taking this past year's total expenses and dividing by 4 percent. For example, if you spent a total of $50,000 this past year (including taxes), divide that figure by 0.04 for a result of $1.25 million, the amount you would need to retire today.
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