Online retirement calculators are now very common in the financial planning world, with each calculator offering various features. This retirement calculator by Sarwa, a robo advisory in the UAE, for example, allows you to plan your retirement by easily calculating several factors, including your current age, initial savings, expected age of retirement and monthly contributions, and – most importantly – your desired level of monthly income at retirement.
In this article, we consider what retirement calculators are, how they work, and what they do. In essence, we’ll look at how a retirement calculator can better help your financial planning.
What is a retirement calculator?
A retirement calculator is a type of calculator that helps you determine how much you should be saving to retire at a certain age with a certain desired income level.
Online retirement calculators have become an important part of retirement planning, which is a subset of financial planning. The goal of retirement planning is to help you make sound decisions today in view of your retirement in the future, and online retirement calculators are now an integral part of that.
Determining how much money you need to be saving today to retire comfortably used to be the function of your financial advisor. However, financial advisors have democratised this calculation through publicly available online retirement calculators, allowing them to focus on building the portfolio that will better help you achieve your retirement goals.
But how do these calculators work?
How a retirement calculator works
These calculators require that you input certain factors about yourself, which include:
- Your current age
- Your desired retirement age
- Your desired monthly income during retirement
- Total current savings: The total amount you have currently saved for retirement.
- Monthly savings: How much you want to be saving every month, going forward.
In addition to these factors, retirement calculators will also make some basic assumptions, some of which you will have to provide info for:
- Inflation rate: How the cost of goods and services will increase during your retirement.
- Investment return: The rate at which your current and future savings will grow until retirement and the rate at which your nest egg will grow during retirement.
- Inheritance: The amount of money you want to leave for your family or relatives when you die, if any.
- Life expectancy: Whether your nest egg will be sufficient, depending on how long you are expected to live between retirement and death. (Retirement calculators usually make an estimate based on your location.)
Based on these inputs, the calculator will return the amount you need to have as your nest egg at retirement.
Some calculators, like Sarwa’s, will then use this information to determine if your monthly savings (see above) will be sufficient to achieve that nest egg.
You can keep tweaking the monthly savings figure to get the figure you need to achieve your retirement goals.
Improving your financial goals with a retirement calculator
The primary use of a retirement calculator is to help you decide if your current savings habit will sustain you in retirement. It’s not enough to know how much you’ll need in retirement, you have to know if you are on course to raise that amount.
If your savings won’t be enough, there are different things you can do:
- Increase your monthly savings
- Retire later (increase your desired retirement age)
- Reduce your desired income during retirement
- Increase your investment return
Some of these options can be difficult decisions, and you will be better served talking to your financial advisor before making a choice.
With digital financial advisors like Sarwa, you can speak to a wealth advisor that will help you make the right retirement choices based on the results you get from the retirement calculator.
In this way, a retirement calculator can be the foundation for your financial planning as it informs you and the wealth advisor the decisions that will best serve your future retirement (and financial) goals.