Welcome back to my fourth and final post on retirement calculators. These online tools help you determine how much you'll need to save for retirement. My first post showed the wide range of contribution amounts that several different calculators would suggest for a hypothetical couple, while my second post provided in-depth results about each calculator and identified two of my favorites. The third post offered some thoughts on how best to select and use a retirement calculator that fits your needs.

This final article coaches you on how to answer a few common questions that retirement calculators ask to help estimate how much you should save for retirement.

Tip #1: What rate of return do you expect on your retirement savings?

Some calculators ask for your input about the rate of return you expect to get on your retirement savings and the future rate of inflation, while others make these assumptions for you. The assumed rate of return is a crucial assumption that can significantly impact the answer to the question, "How much you should save?"

Your assumption for the rate of return on your retirement savings should match the method you've used to invest these savings. For a portfolio balanced between stocks and bonds, I'd use no more than a 6 percent annual rate of return, given today's low-interest environment. If you really feel lucky, go ahead and use 7 percent, but I wouldn't go any higher.

These suggested assumptions assume you're using index funds with very low expenses. If you're using mutual funds with expenses well above 0.50 percent (50 basis points), reduce your expected rate of return by the level of investment expenses you're paying. This will increase the amount you need to save, which might cause you to take a hard look at the level of expenses that you're paying (a good thing, in my opinion).

I'd use a rate of inflation that's 2 or 3 percent lower than the expected rate of return on your savings; again, use a 4 percent difference only if you feel real lucky.

If you're invested entirely in bonds, determine the current interest yield on your investments and use that rate; it might be in the 3 to 5 percent range. If you're invested entirely in savings accounts or money market funds, you're earning almost nothing, and a calculator will tell you that you'll need to save a boatload of money. This should also cause you to rethink your investment strategy.

It's definitely worth the effort to try a few different assumptions to see how they affect the results. Eventually, however, you'll need to pick one set of assumptions that you're comfortable with.

Tip #2: When do you expect to retire?

View original post here:
5 Tips for Using Retirement Calculators