The sooner you begin to plan and save for retirement, the better your chances of being able to live well during your golden years. However, planning and saving for retirement is often easier said than done. While everyone will agree that saving for retirement is the right thing to do, we often put it off.
Many of us do not save for retirement due to the fact that we can’t find room in our budgets to save money. In addition, it’s also common to make the decision not to save for retirement because we place more value on spending our money today rather than years in the future.
The final reason why we usually don’t save for retirement is that we don’t have a retirement plan, thus don’t know how much we will need in order to retire. There are a couple awesome (and free) online tools that will help you build a retirement plan. These tools will help you calculate how much you need to save and how much you can afford during retirement by answering two critical retirement questions.
How Much Will I Need to Retire
The first step in the retirement planning process is to determine your annual income needs during retirement. Your post retirement cash flow needs will be heavily contingent on your desired standard of living and “must pay” expenses such as your mortgage, utilities, food and clothing.
Once you have estimated your annual expenses during retirement, you should then determine how much you will need to save and invest on an annual basis in order to retire on time. The amount of money that you will have to save on an annual basis will depend on how many years you have until retirement, your expected investment growth rate and inflation over the same period.
After you have gathered your retirement planning information, you can use the Wall Street Journal’s Retirement Planning Tool to calculate how much you will need to retire. This application is one of the most robust free retirement planning tools available online. Not only will you be able to develop your retirement plan, but also perform what-if analysis to help you make better financial decisions.
How Much Can I Spend During Retirement
Another common issue when it comes to retirement planning is determining how much of your nest egg you can spend during retirement. This question is usually raised under stress when nearing or getting close to retirement. The amount of money that you will be able to draw from your accounts in your golden years will have a huge impact on your quality of life.
More often than not, calculating your nest egg withdraw rate entails making a few assumptions. Planning factors such as length of retirement, starting portfolio balance and owned asset classes are critical in determining what percent of your funds you can withdraw on an annual basis.
If you are planning to use your taxable portfolio for retirement income, Vanguard provides a Retirement Nestegg Calculator that allows you to determine how large your portfolio will need to be at the start of retirement and an estimate of a feasible nest egg withdrawal rate given your retirement expectations.
Despite the fact that Vanguard’s Nestegg Calculator is easy to use, it has a robust simulation function that allows you to determine the probability that you will be able to draw on your nest egg through retirement. You can use this functions to perform what-if analyses by changing the various assumptions and re-running the simulation.
When developing your retirement plan remember that the sooner you start the easier it will be. The most efficient way to answer the most popular retirement planning questions is to use free online retirement planning tools.