How to Create and Use a Retirement Savings Longevity Calculator
Do you have enough money saved to last through retirement? Here’s how you can estimate if you have enough for your golden years.
May 30, 2022
This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment adviser before making investment decisions.
When it comes to retirement planning, few things are more important than figuring out how long your retirement savings will last. Each person’s retirement budget is different. The rate of return on your investments, additional retirement income and expected expenses are just a few factors to consider.
With a quality retirement savings longevity calculator on your side, you can be better prepared for the financial planning side of retirement. By knowing how long your retirement savings will last, you can start planning now.
In this article, we’ll help you understand how to build your savings, what expenses to plan for and how to easily create a retirement savings longevity calculator in a Google Sheet.
How to build your retirement savings
The sooner you can start saving, the better — especially if you put your money in a high-growth account. Unless the company you work for provides a monthly pension, you’ll need to replace the income you earned in your job during retirement. Social Security benefits provide an average benefit of $1,657 per month, which isn’t enough to cover most people’s average annual expenses on its own.
According to Fidelity, you should aim to save at least 15% of your income for retirement. However, if you start saving later, you’ll have to save more; if you wait until you’re 35 to start saving, the recommended amount goes up to 23%.
To illustrate, if you’re 25 years old with an average annual income of $50,000, you should try to save at least $7,500 per year. If you don’t start saving until 35, however, you’d need to save $11,500 per year to catch up.
The following are some of the most common options people use to save for retirement. Understanding how to use them as you save will help you grow your retirement savings at an appropriate rate.
Putting money into a savings account, rather than leaving it in a checking account, allows your money to grow through compounded interest. How much your savings will grow over time depends on the interest rate on the account. However, savings accounts shouldn’t be your be-all-end-all solution to retirement savings. They often have low interest rates that are less than the rate of inflation.
Money market accounts offer a higher rate of return, though still not as high as retirement accounts or stocks. However, there’s no risk of losing the future value of your savings because growth is tied to the interest rate set by the bank rather than the stock market. These accounts can be a good way to supplement the savings you add to retirement accounts.
IRAs and other retirement accounts
Traditional IRAs, Roth IRAs, and 401(k)s are managed retirement savings accounts that grow through compounding interest. IRAs utilize a variety of stocks, bonds and other assets to beat the rate of inflation.
However, you’re somewhat limited in how much you can contribute to these accounts each year. For traditional and Roth IRAs, you can contribute up to $6,000 a year, or $7,000 if you’re 50 or older. For 401(k) accounts (which can use employer contributions to boost retirement savings), employees can defer up to $20,500 per year, as of 2022.
While early withdrawals are technically allowed for IRAs and other retirement accounts, they generally aren’t recommended. Withdrawing from a traditional IRA account will result in a 10% penalty, must be reported on your taxes and might increase your tax liability. If you withdraw earnings from a Roth IRA, you could also be required to pay a penalty.
Stocks and other assets
There are other retirement investments you can make after you max out your retirement accounts. For example, putting money in the stock market can provide a significant investment return if you invest in successful stocks and mutual funds. However, stock market investments are inherently risky, and you could lose money if the value of a stock decreases. You’ll also need to pay taxes on any realized gains, which could increase your tax bill.
Real estate can also increase your retirement savings. For example, if you live in a home that’s paid off, you could sell it and use that equity to downsize to a smaller home or buy in a less expensive area. The remaining funds can supplement your retirement savings.
Consider your expenses
While some expenses may decrease once you reach retirement age, this isn’t true for everyone. You may have paid off your home by the time you reach retirement, but medical conditions could cause health care costs to rise. Carefully calculating how much you’ll spend during retirement will help you avoid cash flow problems later on. The following are some of the most common retirement expenses you should plan for.
Cost of living
Your cost of living describes all those expenses that are necessary for day-to-day living. This includes your mortgage or rent, utility bills, food expenses, insurance coverage and so on. Add up the total monthly and yearly expenses for what you’ll expect to pay during retirement to cover your cost of living. For example, if your projected monthly cost of living in retirement is $2,000, you’ll need to have at least $24,000 available each year to cover your annual expenses.
Your tax rate
The investments you make before retirement can affect your tax rate after you retire. For example, Roth IRA donations are made with post-tax income. As a result, you aren’t taxed when you withdraw money from these accounts. Traditional IRAs, on the other hand, are taxed when withdrawals are made (although you can deduct IRA contributions from your taxes in the year you make them).
Stock gains will also be taxed. Be mindful of how much you withdraw from taxable accounts each year, as this will affect how much money you owe the government.
Your preferred lifestyle
For many people, retirement is an opportunity to enjoy life. Seventy percent of Americans say they want to travel during retirement. Eating out, going to events with family members and other activities will increase your spending beyond what’s needed to cover your costs of living.
When planning your retirement budget, try to at least make a rough estimate of the amount of money you would spend on these types of activities each year.
You never know what changes might come your way between now and retirement. A child might need help to pay for college. You or your spouse could develop a medical condition that requires ongoing treatment. Your home’s HVAC system could break down just after the warranty period ends, resulting in a one-time purchase of several thousand dollars.
Such events can put a serious dent in your retirement plans. By making a list of potential “unexpected costs” and setting aside a portion of your retirement savings for emergencies, you can be better prepared for whatever the future might bring.
To achieve this, try to maximize your savings whenever possible. The more you can contribute toward retirement, the more your money will grow through compounding interest.
Plugging it all into a retirement savings longevity calculator
Now that you have an idea of how to build your savings and what expenses you’ll need to plan for, you can start crunching the numbers. As it turns out, you can figure out how long your retirement savings will last with the help of a Google Sheet (you can use Excel if you’d prefer).
To calculate this in a Google Sheet, you’ll need three key pieces of information. To start, you need to know how much money you have in your retirement savings accounts (or how much you expect to have upon retirement).
Next, you need to determine your expected real rate of return — the percentage of growth you expect after inflation. For example, if your investments grow at a rate of 6% per year but inflation is 4% per year, your real rate of return would be 2%. These rates can vary, so it’s best to consult a financial adviser to help with your projections.
Finally, you need to know the amount of money you expect to withdraw each month to cover expenses in retirement. This will be based on your costs and other sources of income. For example, if you think you’ll need $7,500 per month but you’ll receive $1,500 per month from Social Security, you’d plan to withdraw $6,000 per month from your retirement accounts.
Once you have your data, it’s time to create a new Google Sheet (not a Document). From the top menu, click “Insert,” then go to “Function,” “Financial,” and select “NPER”.
“=NPER( )” will appear in your selected cell along with a popup message with instructions. To calculate how long your retirement savings will last, you’ll plug in the following within the parentheses, with each number separated by a comma:
Rate of return
Monthly withdrawal amount
Present value of your retirement savings
For your rate of return, plug in the return percentage divided by 12 to get a monthly return rate. For this example, we’ll use “2%/12”. Next, enter your monthly withdrawal amount. For this example, let’s assume you need $5,000 to cover your living expenses, so you’ll type “5000”. For the last number, you’ll enter your total retirement savings as a negative number. So, if you’ve $1,000,000 in retirement savings, you’ll type “-1000000”.
The function in your Google Sheet would read like this: =NPER(2%/12, 5000, -1000000)
This function gives us a “total” of 243.48, which tells us how many months your retirement savings would last with these numbers. Divide this by 12, and we find that it’s a little more than 20 years’ worth of retirement savings.
You don’t need a retirement savings longevity calculator to start saving
While a retirement savings longevity calculator can give you a better idea of how much you’ll need to comfortably retire, what matters most is that you start saving sooner rather than later. Even if the monthly savings you can set aside for retirement are small, they can still make a difference in the long run.
The more that you can set aside for retirement, the easier it’ll be to reach your retirement goals. If credit card debt is making it hard to save, Tally† may be able to help. Tally is an easy-to-use app that helps you efficiently pay down your credit card balances with a lower-interest line of credit.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.