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How to Ballpark your Retirement Nest Egg
There are lots of tools online to help you estimate how much money you will have in the future based on specified conditions: CD calculators, 401K calculators, inflation calculators, etc. Unfortunately, I've yet to find a single website that combines all of these different estimates together into a single figure that answers the most important question of all: what will my annual income be when I retire?
Below I'll show you how I used a bunch of different calculation tools together to answer this question.
Before we begin, keep in mind this tutorial assumes you will be contributing to a 401k and that you will one day be eligible for social security benefits in the United States. It also assumes that once you retire, you will live off the interest of your 401k via a certificate of deposit. If you don't agree with any of these assumptions, feel free to make changes to the instructions below as you see fit.
Also, regarding your retirement age, keep the following in mind.
OK. Let's get started. For each step below, click the link, fill out the respective calculator, then enter the calculated amount into the form towards the bottom of this page.
Step 1: Estimate what your 401K will be when you retire. For rate of return, try 4%. Enter the total amount in the form below. Keep in mind that, after you complete all of the steps below, you can repeat the whole process again, but this time use 8% here (or whatever number you like). This will allow you to prepare for different scenarios.
Step 2: Determine how much your 401k will be worth after inflation. For the amount, enter the number you calculated from Step 1. For starting year, enter the year you plan on retiring. For target year, enter this year. After hitting Calculate, you can see what inflation rate was used for each year by clicking Show Rates. Try not to cry when looking at how badly inflation is going to eat away at your nest egg. Enter the total amount in the form below
Step 3: Determine how much you can make a year off the interest of your 401k. For the CD amount, enter the figure you found in Step 2 so that you are working with the actual value, not the inflated value. For interest rate, something like 5% is conservative and reasonable. For number of months, enter 12. Enter the total amount of interest earned over a year in the form below.
Step 4: Calculate your annual social security benefits. Ensure you select today's dollars. After your enter all the correct information and click Calculate, enter the dollar amount that appears next to Your monthly retirement benefit in the form below. Be sure to take into account the potential penalty you may incur if you retire before your full retirement age.
Step 5: Fill out the following form then click Calculate. Enter numbers and decimal points only. Do NOT enter dollar signs or commas. Scroll down to the bottom of the page after submitting the form.
There are lots of tools online to help you estimate how much money you will have in the future based on specified conditions: CD calculators, 401K calculators, inflation calculators, etc. Unfortunately, I've yet to find a single website that combines all of these different estimates together into a single figure that answers the most important question of all: what will my annual income be when I retire?
Below I'll show you how I used a bunch of different calculation tools together to answer this question.
Before we begin, keep in mind this tutorial assumes you will be contributing to a 401k and that you will one day be eligible for social security benefits in the United States. It also assumes that once you retire, you will live off the interest of your 401k via a certificate of deposit. If you don't agree with any of these assumptions, feel free to make changes to the instructions below as you see fit.
Also, regarding your retirement age, keep the following in mind.
The earliest you can retire and receive [social security] benefits is age 62, but your payments will be reduced if you retire before your full retirement age. The age for receiving full benefits and the reduction for early retirement is increasing. The schedule will add two months each year until 2027, when workers born in 1960 and later will have to be 67 years old to qualify for full benefits. Eligibility for reduced benefits at age 62 won't change, nor will the age of eligibility for Medicare, which is 65. (Source)If you were born in 1960 or later, here is a page that breaks down just how penalized you will be for retiring before your full retirement age. Here is a similar page if you were born before 1960.
OK. Let's get started. For each step below, click the link, fill out the respective calculator, then enter the calculated amount into the form towards the bottom of this page.
Step 1: Estimate what your 401K will be when you retire. For rate of return, try 4%. Enter the total amount in the form below. Keep in mind that, after you complete all of the steps below, you can repeat the whole process again, but this time use 8% here (or whatever number you like). This will allow you to prepare for different scenarios.
Step 2: Determine how much your 401k will be worth after inflation. For the amount, enter the number you calculated from Step 1. For starting year, enter the year you plan on retiring. For target year, enter this year. After hitting Calculate, you can see what inflation rate was used for each year by clicking Show Rates. Try not to cry when looking at how badly inflation is going to eat away at your nest egg. Enter the total amount in the form below
Step 3: Determine how much you can make a year off the interest of your 401k. For the CD amount, enter the figure you found in Step 2 so that you are working with the actual value, not the inflated value. For interest rate, something like 5% is conservative and reasonable. For number of months, enter 12. Enter the total amount of interest earned over a year in the form below.
Step 4: Calculate your annual social security benefits. Ensure you select today's dollars. After your enter all the correct information and click Calculate, enter the dollar amount that appears next to Your monthly retirement benefit in the form below. Be sure to take into account the potential penalty you may incur if you retire before your full retirement age.
Step 5: Fill out the following form then click Calculate. Enter numbers and decimal points only. Do NOT enter dollar signs or commas. Scroll down to the bottom of the page after submitting the form.