The “Can I retire?” assessment (sometimes characterized as the “Will I be able to retire?” quiz) typically distills down to three basic parts. The first part is a principle: We want the freedom to spend “x amount” every year while I am retired. (We also want our spending to keep pace with inflation, of course.) The second part requires a careful look at (and accurate quantification) of your current retirement nest egg. Third, we have the payoff question: Can I safely generate at least an “x amount” of income from my retirement nest egg until I die?
Fortunately, the wonders of the Internet present us with lots of opportunities and tools to evaluate our retirement readiness. One tool that receives a lot of favorable attention is the Retirement Income Calculator brought to us by T. Rowe Price.
I like the Retirement Income Calculator for four reasons. First, its free! Second, it uses Monte Carlo analysis which can be an effective way to incorporate probability and future uncertainty into income projections. This can make the projections more realistic and reliable. Third, the tool makes it very easy to look at different “what if” scenarios, based on strategies such as changing your asset allocation. Fourth, if you register on the site (free), the tool will store your data for future updating and review.
Last week I paid another visit to the T. Rowe Price site to re-rerun the calculator based on our current data. I observed a couple of things that gave me some satisfaction.
First, the retirement income projected by the tool was consistent with data provided by the analysis tool embedded in my 401(k) plan site. That tool is powered by Financial Engines which is also known for its Monte Carlo algorithms.
Second, as an alternative scenario, I asked the T. Rowe Price calculator to estimate our retirement income after hypothetically adjusting our asset allocation to one that it recommended. With that change, it estimated that our monthly retirement income would be 4.9% higher. The trade-off would be that we would have to more than double our allocation in equities. That is a lot more risk than I am willing to take at this point, taking into account that our current income projection is more than adequate in my mind.
If you are inclined to run your own numbers, here is the link to the tool. Make sure you have your financial data ready to enter into the tool. Good luck!