6 Extremely Important Questions To Ask When Running Your Retirement Calculations

Ever since I started work, I’ve been obsessed with achieving financial freedom. Because of this obsession, I constantly run different scenarios using retirement calculators to assess where I stand.

Fortunately for me, my retirement calculation result has been very favorable despite the very challenging stock and crypto markets.

I consider myself financially free if I can retire tomorrow – doesn’t mean I need to retire but at least it is comforting to know that I can.

Having financial freedom means I can dictate where and how I spend my time and not be under the thumb of a corporate overseer.

It gives me great pleasure to say that based on my retirement calculations, I am financially free.

It took careful planning, determination, and decades of sticking to my approach to finally reach financial freedom.

Over the years, I have refined the inputs in running my retirement analysis. Looking back at it now, there are 6 considerations that everyone should keep in mind when running their retirement analysis.

Using The Right Retirement Calculator

First off, in running your retirement analysis, you need to determine the right retirement calculator to use.

I put retirement calculators into 3 character buckets.

Bucket 1: Free vs. Cost

There are retirement calculators that are completely free and accessible on the internet without having to register, provide an email, or pay a fee.

And then there are calculators in which you have to sign up for an account with the company in order to use.

For others, you might need to provide an email to obtain the result or, worse, pay a fee for the analysis.

I spend most of my time using free calculators. I like things when they are hassle-free without any strings attached.

Bucket 2: High Input Options vs. Limited Inputs

There are retirement calculators which ask for 5 items and others that can ask for your life’s story.

I generally like ones where there are options to provide more information but you can obtain an analysis with very little input.

I favor calculators that can run your information by answering a handful of questions with other inputs left to default assumptions.

Then, if you want to customize it, you have the option to change any of the default inputs.

Bucket 3: Static vs. Simulation When Running Investment Returns And Inflation

Some retirement calculators allow you to add a rate of return on your investment portfolio and your own entry for the inflation rate.

Some might even allow you to put in 2 rates of investment return: one while working and a separate one during retirement.

Those calculators provide for static entry of such rates. The rate of investment return and rate of inflation do not change over time.

We know, even though the S&P 500 has returned about 10% annually for the past 50, there were periods of significant losses followed by periods of significant gains.

It wasn’t a consistent 10% return year over year.

I like retirement calculators that use historical information or random sampling and run simulations based on such information.

You might have heard of running a retirement analysis using a Monte Carlo simulation. Monte Carlo simulation involves using various inputs and then trying to predict a variety of outcomes based on those inputs.

Monte Carlo simulations can be run with historical information or variables grounded by historical information.

That way, information is grounded on historical information and all the variables that come with a volatile market are factored in.

In my mind, using a retirement calculator that allows for simulation is superior to a static one.

The timing of market performance matters when you are withdrawing money from your investment portfolio.

The Best Free Retirement Calculator

While there are a lot of retirement calculators out there, the best free one I’ve encountered without the need for any fee or registration is Firecalc.com.

I think Firecalc.com provides the right mix of custom inputs while using historical data to run your analysis for both investment returns and inflation rates.

One knock I have with Firecalc.com is that it isn’t really for beginners. Also, the layout is not the most user-friendly.

You definitely need to spend some time understanding where to input all the variables. But once you have a good handle on the site, it is easy to navigate, and very quick to change inputs.

Not only does this retirement calculator let you know if you have achieved the ability to retire, but it also provides different analyses that you can perform. Such analyses include the impact of delaying your retirement, what is the max amount you can withdraw, and the impact of changing your investment allocation.

However, like any tool you use, put garbage in and you get garbage out.

That’s why it is extremely important you have a good handle on your financial situation.

With that in mind, let’s make sure you have factored in the questions below when running your retirement calculations.

Question #1: What Is Your Desired Lifestyle?

First off, to determine if you are financially free and ready for retirement, you need to have a good handle on what you want your desired lifestyle to be.

And you need to understand how much it costs to provide for such a desired lifestyle.

I’ve settled into a nice groove over the past three to four years on a lifestyle I am happy with.

That way, I have a good sense of what I need to maintain my current lifestyle.

I can also adjust the budget if I want to add additional expenditures or reduce some discretionary spending.

The biggest hurdle I see people have with the desired lifestyle is that they don’t know what they want their lifestyle to look like 5 years to 10 years in the future.

This can be especially true for people who plan to retire at a young age (in their 30s) before having a family or kids.

The budget to support a single person looks different than the budget to support a family of 3. And the budget for a family of 3 looks different than the budget for a family of 5.

It is hard to pin down the desired lifestyle if your lifestyle isn’t set yet.

Therefore, bake in some flexibility and cushion with your numbers to provide optionality for a lifestyle shift.

Question #2: Did You Include Healthcare Cost In Your Analysis?

A lot of corporate employers subsidize healthcare.

I know many employees complain about company-subsidized healthcare. Common complaints are that coverage is poor and the premium is high.

Maybe unbeknownst to them is how much healthcare cost really is and the dollar amount being subsidized by the employer.

In retirement, you are no longer receiving the benefit of the employer subsidy.

Therefore, the true healthcare cost should be part of your expense equation. Check out heathcare.gov to get a sense of the healthcare cost for you and your family.

I’ve budgeted $30,000 per year in healthcare costs for my family of 5 in my calculation.

Question #3: How Steady Is Your Cash Flow?

The way to retirement or financial freedom is by constructing a cash flow stream that can meet all your expenses.

It took me over 15 years to build my real estate investment portfolio to a point where my net rental cash flow can cover all my expenses.

But how steady is this cash flow? I was able to stress test it during COVID.

Some tenants were delinquent on payments given the challenging economy during the pandemic.

My rental cash flow took a 40% hit during the depth of COVID. Fortunately, with government aid provided to my tenants and rental assistance programs, I ended up recovering most of the missed rent.

Not only can rental cash flow be impacted during economic uncertainty.

Dividend payments can get slashed during a recession in your equity portfolio. Companies or municipalities can default on their interest payments in your fixed-income portfolio.

If part of your retirement calculation is dependent on a cash flow stream, then you need to assess how stable it is. Make sure to risk it as well when running your numbers.

Question #4: Do You Have Any Big Cash Flow Event In The Future?

Sometimes, we are very focused on the present or the immediate future that we lose sight of significant events that can happen 20 years down the line.

For anyone who is staring at financial freedom or retirement at a young age (30s to early 50s), you should consider any big future cash outflow in your analysis.

I incorporate big future cash outflow in my analysis. I tend to not factor in any big cash inflow just to be more conservative in my analysis.

College payments, weddings, a vacation home, financial assistance for aging parents, helping your kids with their down payments, and a once-in-a-lifetime worldwide trip are some of the things you might want to reserve cash aside.

Question #5: What Confidence Level Are You Aiming For In Your Retirement Analysis?

When running simulations of your retirement analysis, what success rate or level of confidence is your aim?

The future is unpredictable.

The Monte Carlo simulation model can try its best to factor in variables based on historical events but then there can be black swan events never experienced before.

In a retirement stimulation, different inputs are used to determine different outcomes. A confidence level of 95% means you have achieved a successful retirement 95% of the time.

For instance, if you run the simulation 100 different times with different inputs, and your investments can outlive your expenses 80 of those times, then the confidence level is 80%.

While advice varies from adviser to adviser on the confidence level, I’ve seen advisers aim for between 75% to 85%.

As someone who is more financially conservative, I like to shoot for as close to 100% as possible. I would personally not feel comfortable with a success rate lower than 95%.

In fact, many times, I like to know what the maximum withdrawal is to obtain a 100% confidence level.

I never want to be in a situation where I run out of money to support my lifestyle in retirement.

Question #6: Do You Have Flexibility With Your Expenses?

Flexibility with your expenses can impact the level of confidence you shoot for in running retirement stimulations.

You can aim for a lower confidence rate if you have a budget with a high degree of discretionary spending. A lower-level confidence rate means you can withdraw more money per year.

The reason behind the higher withdrawal rate (and moving to a lower confidence level) is that you can be flexible enough to lower your withdrawals in a bad market. You don’t have to be a forced seller of assets at a depressed price to pay for your everyday expenses.

Decreasing your withdrawal amount when times are bad allows for your investment portfolio to recover when the overall market recovers.

This allows for a higher withdrawal rate during normal market times.

Conclusion

There are many questions to consider when running your retirement analysis.

I’ve listed some above that I didn’t factor in until a few years into my financial freedom journey.

Your result in running your retirement calculation is only as good as the information you provide.

The best course is to revisit your retirement assumptions at least once a year to refine the inputs as more current information is known.

To The Audience: What other considerations do you use when running your retirement calculator? What confidence level do you try to achieve when running Monte Carlo retirement simulations? Which is the best retirement calculator you have used?