Get Real
Presenting U.S. News's ultimate retirement calculator--the essential tool you need to plot your strategy for the future
Most of us guess how much we should save for retirement by using what Sylvester Schieber, a pension expert with Watson Wyatt Worldwide of Bethesda, Md., calls the "look around" method: We look around at how people older than ourselves are doing--parents, neighbors, or colleagues--and take our cues from their example.
But there's a problem with this approach. "It works just fine in a stable environment," says Schieber, "but today's retirement world is very unstable." To plan for a future in which Social Security and Medicare may or may not be there when you need them, in which private pensions are uncertain, in which you may live in retirement for one year or 40, you need some hard numbers, and you need to do some hard thinking.
Plenty of people want to help you; mutual funds offer what they call retirement calculators, and so do brokerages. The problem with most of them, however, is that they've been developed as sales tools, and often contain critical assumptions that are either naive or inappropriate to your individual circumstances.
Some predict full Social Security benefits after retirement, others none. Worse, many of the underpinnings are unstated or unconsidered. The mathematics of compound interest used in retirement calculators is not particularly difficult, but figuring out the right assumptions to put into their equations, such as the rate of return you'll earn on your savings and the number of years you'll be living in retirement, is enormously challenging, requiring not only some knowledge of economic history but a good grasp of political developments and the changing realities of human life expectancy.
That's why U.S. News has teamed up with Watson Wyatt Worldwide to develop what we hope will be the only retirement calculator you'll ever need. It comes in two versions. One is the series of work sheets. A more sophisticated, interactive version is posted on our Web site. What distinguishes both of them is not just that they allow you to tailor your calculations to your individual circumstances but that they give you the background information you need to decide what assumptions you should reasonably make. Even minor changes in the assumptions you use can produce huge differences in results. We encourage you to experiment with different assumptions when filling out the work sheets so you get a sense of how much your current need to save for retirement depends on your beliefs about the future.
What are the most critical errors people make in choosing their assumptions? Here are the seven greatest mistakes of retirement planning:
The market power illusion I'll always get raises and I'll be able to work as long as I want.
Estimating your future earning power is important when planning for retirement for two reasons. First, if you can count on substantial raises in the future, this will reduce the proportion of your income you need to save now to achieve a given standard of living in retirement. For example, suppose you want to accumulate $500,000 over the next 30 years and can count on earning a 4 percent return above inflation on your savings. If your income today is $40,000 and you can count on receiving 5 percent raises over inflation each year, then you need save only 11.6 percent of your income to achieve your objective. But if your raises average only 3 percent, you'll wind up more than $121,000 short of your goal.
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