Which Retirement Income Calculator Should I Use
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Choosing the Right Retirement Income Calculator
This lens goes into a little detail about what a Retirement Income Calculator should do on your behalf. There are any number of retirement calculators available online, but only a few are really helpful. There are many reasons for this. Some calculators are biased, or part of a larger campaign to earn your business. Others are built by individuals that are just experimenting with their programming skills and really have no deep understanding of finance. Some are well meaning, but are too simplistic and may place an individual in a false sense of security. This lens goes into some of these pratfalls so that you can find a truly useful retirement calculator for your situation.
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You need to Include Stock Market Volatility
To Model Your Retirement Income
Not every Retirement Income Calculator is equal. Some are very good, and others are an abomination. This page is about retirement calculators used to plan for retirement income. There are basically two types of retirement products, a defined benefit plan and a defined contribution plan.
If you have a defined benefit plan, you probably work for a government or municipality. In this case, a very specialized calculator will be needed to determine your income, and it's probably on your employer's website. This is because your retirement is based on years of service and salary, as well as some other factors. Your employer undertakes most of the risk in providing the benefit. A defined benefit plan is also known as a pension, and traditionally, this means that it is geared towards providing you with a monthly income for as long as you live. You may have the option of withdrawing the funds, but you may be charged steep penalty!
If your plan is a 401(k), or a 401(a), or a 403(b), then you have a defined contribution plan. This sort of plan provides a benefit based on how much you have contributed and how well the underlying investments have performed. There are a huge number of retirement calculators online that will help you determine how long the income will last. Many of these a flawed, so be careful.
What Your Retirement Income Calculator Shouldn't Do
Perhaps the biggest problem out there is that most retirement calculators assume a fixed rate of return. This is fine if you are invested conservatively, i.e. in interest bearing instruments that you are holding outright. However, if you are invested in mutual funds, or ETFs, or stocks, then your earnings are going to fluctuate greatly from year to year. In that case, using a flat return is downright dangerous.
What you need in that case is a calculator which can take into account stock market volatility. This means that it incorporates random number generation, and an iterative process known as monte carlo simulation, or regression analysis. These features will subject your income withdrawal model to a stress test by running a scenario over and over again, perhaps a thousand times, and then performing some statistical analysis to determine the probability of success.
If you have a defined benefit plan, you probably work for a government or municipality. In this case, a very specialized calculator will be needed to determine your income, and it's probably on your employer's website. This is because your retirement is based on years of service and salary, as well as some other factors. Your employer undertakes most of the risk in providing the benefit. A defined benefit plan is also known as a pension, and traditionally, this means that it is geared towards providing you with a monthly income for as long as you live. You may have the option of withdrawing the funds, but you may be charged steep penalty!
If your plan is a 401(k), or a 401(a), or a 403(b), then you have a defined contribution plan. This sort of plan provides a benefit based on how much you have contributed and how well the underlying investments have performed. There are a huge number of retirement calculators online that will help you determine how long the income will last. Many of these a flawed, so be careful.
What Your Retirement Income Calculator Shouldn't Do
Perhaps the biggest problem out there is that most retirement calculators assume a fixed rate of return. This is fine if you are invested conservatively, i.e. in interest bearing instruments that you are holding outright. However, if you are invested in mutual funds, or ETFs, or stocks, then your earnings are going to fluctuate greatly from year to year. In that case, using a flat return is downright dangerous.
What you need in that case is a calculator which can take into account stock market volatility. This means that it incorporates random number generation, and an iterative process known as monte carlo simulation, or regression analysis. These features will subject your income withdrawal model to a stress test by running a scenario over and over again, perhaps a thousand times, and then performing some statistical analysis to determine the probability of success.
Intro to Retirement Calculator Training
So That You Can Make the Best Decision!
Here is a snippit from www.myretirementlibrary.com. They offer an entire course for free online on how to compare a life annuity and a periodic withdrawal!
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Monte Carlo Analysis
What are the Downsides?
Not everyone is a fan of Monte Carlo Analysis. A lot of financial planners complain that it doesn't put enough emphasis on worst-case scenarios. This may be true, but on the other hand, employing it to mimic variable returns is far superior to just using a flat rate of return, which is much more of a danger. At any rate, it should be just one tool in the toolbox. There is not one method that is 100% reliable when doing your retirement planning.
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freeship
Feb 12, 2012 @ 2:32 am | delete
- If you are prepared, you will not be surprised of the likelihood of a great difference in monetary value that your money's worth is far from the one in your own country.
mortgage calculator
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CaraLarose
Jan 30, 2011 @ 10:28 pm | delete
- I think, this retirement income calculator is very useful for my retirement. Pennsylvania, my current hometown has a lot of homes for retirement (PA). So, if I'll retire, I still want to stay here in hometown.
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SmartChica
Dec 9, 2010 @ 11:02 am | delete
- Thanks for the calculator info. Do you have a link list to calculators you recommend?
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AJNelson
Dec 9, 2010 @ 2:12 pm | delete
- Hi SmartChica,
There is an indepth tutorial with video and interactive calculators at www.myretirementlibrary.com. The tutorial is not designed to provide an answer to the question "What should I do?", but is designed to educate individuals on what they should look for in a calculator tool when seeking retirement planning advice.
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by AJNelson
Hello world. This is my bio. I can edit it later!
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