Which Retirement Income Calculator Should I Use

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.

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.