Is a Retirement Investment Calculator of any use?

A retirement investment calculator could be very misleading when used in isolation. However, when you have educated yourself about retirement investment planning, such a calculator could be used for rough estimates.

On this Web site we devoted an entire section to Retirement Planning Calculators. You'll find reviews of several calculators in that section.

However, before you play with any retirement calculator, educate yourself to overcome any uncertainty in taking control of your retirement planning.

When you consider such a calculator, Keep the following in mind:

  • When planning during your pre-retirement years, your regular deposits benefit from cost averaging and you effectively get a higher return. During retirement, regular withdrawals reverse the benefit from cost averaging and effectively produce lower returns. Generally, retirees will get 1% pa lower return than in the pre-retirement phase.
  • The published returns on mutual funds and variable annuities are gross returns. You must subtract transaction or mutual fund costs. The average investor loses at least 1% pa of the return due to these costs.
  • Retirees use a much more conservative spread for their investments than people still in the work force. Your retirement calculator should allow for this too.
  • Most retirement plans are tax deferred. That means that you don't get taxed on the amount of income received that is diverted to your retirement plan. Your savings also grow at a before-tax rate. Consequently you actually get a higher return on the amount invested. After retirement you get taxed on your withdrawals and the net return on that investment is thus much lower than in pre-retirement years.

I posed the question about the usefulness of an investment calculator under this section that is looking at retirement investment planning because it is important to use such a calculator with caution when you do your planning.

If you have not yet done so, do visit our discussion in this section that answers the question: What is an Investment Retirement Account? You need to visit our section on Retirement Financial Planning for more intensive information on retirement planning.

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