The Employee Benefit Research Institute recently reported that one of the best things you can do to improve your chances at a successful retirement is to use a free online retirement calculator. There's no cost involved, and it takes nothing more than a little bit of your time invested, but the result is a dramatically improved chance that you'll wind up with enough to comfortably retire.
The numbers were astounding. Those who used an online retirement calculator were more likely than even those who used professional financial planners to wind up with a sufficiently funded retirement. To be fair to the planners, though, the EBRI research indicated that those who used planners still did dramatically better than those who merely guessed at what they'd need to retire.
How important is it?
The chart below from EBRI's research shows how much better prepared those who used online calculators were versus the general population it studied. Across all income ranges and family statuses, the act of using an online calculator looked like a tremendous help for anyone looking to retire.
Source: The Employee Benefit Research Institute.
Of course, in reality, it takes more than just putting your financial information into an online calculator to successfully retire. You need to build and execute a plan around the results it shares with you in order to wind up with the resources that'll transform mere retirement into your golden years. But having your costs, nest egg needs, and savings and returns targets spelled out in front of you goes a long way toward providing you with the motivation -- and direction -- you may need to get moving.
Key elements to any successful retirement plan
To have a solid plan, you'll need to have a handle on three key factors and some key building blocks that make up each of those factors:
- Your expenses
- Base living expenses (housing, utilities, food, clothing, transportation)
- Incremental costs of aging (like health care and household help)
- Travel, entertainment, and other like-to-haves
- Your income
- Social Security
- Pension
- Retirement job
- Money from your own savings/investments
- Your time and risk profile
- Years to retirement
- Years in retirement
- Trade-offs you're willing to accept between potential returns and potential losses
With those factors in hand, a good retirement calculator can do the math to help you understand about how much you'll need to put away each paycheck to reach your goals. From there, it's largely a matter of time, consistent execution, and course corrections along the way, as reality never winds up exactly the way we planned it to be.
The risks involved in investing
Speaking of that risk profile, it's important to remember that there really is no such thing as a risk-free investment. Every potential investment has risks associated with it; even cash is exposed to inflation risk and theft risk. Here are a few things to consider about the risks associated with other asset classes:
- Domestic stocks: The S&P Depository Receipt (SPY 1.43%) will let you buy a basket of 500 of the largest U.S.-based company stocks, is pretty well diversified, and has a great long-term track record. Still, there's absolutely no guarantee that the index will go up every year, and as the recent lost decade reminds us, stocks can go a long time before fully recovering.
- Foreign stocks: Vanguard's Total International Stock Index (VXUS 3.06%) ETF will let you buy a diversified basket of stocks headquartered outside the U.S. While there may be higher potential growth outside the U.S., investing internationally adds currency and political risk on top of the risks associated with domestic stock investing.
- Traditional Government bonds: The iShares Barclays 20 Year Treasury Bond (TLT 1.90%) ETF will let you buy long-term Treasury bonds, which carry a government guarantee of repayment. Still, with interest rates at near all-time lows, long-term bonds carry significant duration risk and could lose significant value as a result. These days, shorter-term bonds generally don't pay enough to beat inflation, much less cover inflation and taxes and provide real returns.
- Inflation-protected bonds: The iShares Barclays TIPS Bond (TIP 0.80%) ETF will let you buy bonds with a government repayment guarantee that also step ups due to inflation. But the rates on new inflation-protected bonds are currently negative, which means those bonds provide little more than a guarantee that you'll lose money in real terms over time.
- Real estate: The SPDR Dow Jones Real Estate (RWR 3.27%) ETF will let you buy a broad swath of Real Estate Investment Trusts. And while it's generally true that they're not making any more land, recall that it was a real estate crash that precipitated the financial meltdown that knocked down the global economy just a few years back.
Still -- investing is your best long-term bet
In spite of those very real risks, investing for your retirement over the course of your career still beats the daylights out of not investing at all. And by regularly consulting a retirement calculator to make adjustments while you work through your plan to get from here to retirement, you can best position yourself for long-term success. As the EBRI's report shows, that combination can work wonders.
