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Barbara O'Neill: Retirement Planning Tools for 403(b) Plan Participants

May 16, 2023

By Barbara O'Neill, CFP®, AFC®

Retirement planning for young and middle-aged adults is like target shooting while blindfolded. It is difficult to aim at a goal that is far away and hard to see. Nevertheless, planning is necessary to make key decisions (e.g., where to live in later life) and accumulate adequate savings. Unlike shorter-term financial goals (e.g.,  car, house, college), retirement planning can last for decades (e.g., workers’ 20s through their death).

An earlier post discussed Key 403(b) Plan Resources. This post continues this theme with an overview of retirement planning calculators with inputs for 403(b) savings. Specifically, it describes 13 key data inputs for retirement planning calculations and where to get data required for an accurate analysis. Without accurate inputs (e.g., Social Security and pension benefits), calculations are basically “garbage in, garbage out.”

It is wise to use retirement savings calculators from different sources to compare their results and confirm a range of responses. Different calculators have different inputs and assumptions. This post includes a study about retirement calculator output as well as three “need to know” facts and six take-away action steps.

13 Key Retirement Planning Variables

Retirement plans need numbers or they will remain vague and incomplete. Calculators have different formats and outputs but are alike in one fundamental way: they all determine how much money is needed to fund the gap between someone’s desired retirement income and guaranteed income sources (e.g., Social Security). 

Once key variables are inputted, the amount of required savings can be calculated using embedded time value of money factors. Different scenarios can also be tested by changing key variables (e.g., retirement age). Below is a brief description of 13 retirement planning calculator variables:

  1. Current Annual Income — Individuals will list their current gross income and, married couples, their combined gross income.
  2. Retirement Income Goal — There is no single “right” number. Some experts recommend planning to replace about 75% of preretirement gross income (Variable #1) to maintain a current lifestyle. Their thinking is that some expenses will go down and retirees will no longer be saving in 403(b)s, IRAs, or elsewhere. Others suggest a higher percentage of preretirement income, as high as 100% or 110% to start, to reflect higher spending on travel and eating out during the “go-go” years (age 65-74) and health care during the “slow-go” (75-84) and “no-go” years (85+).
  3. Current Age — The age at which someone does a retirement savings calculation.
  4. Life Expectancy — Like Variable #2, this data input will be an estimate since nobody has a crystal ball to know how long they will live. To get a range of estimates, try several of the life expectancy calculators listed below.
  5. Expected Retirement Age — Individuals will list their future retirement age and married couples should provide an individual response since spouses could retire at different ages.
  6. Number of Years in Retirement — Subtract the response for Variable #5 from Variable #4 (e.g., Age 92 – Age 67 = 25 years)
  7. Number of Years Left to Save — Subtract Variable #3 (current age) from Variable #5 (expected retirement age).
  8. Estimated Social Security Benefit — This information can be obtained from a Social Security benefit estimate statement, available online here. These statements include a bar graph with nine horizontal bars illustrating a worker’s projected monthly benefit at ages 62 through 70. This illustration shows, with both numbers for monthly benefit amounts and the length of the bars, that benefits increase as workers wait longer to claim them. Social Security statements also list a worker’s lifetime earnings to date, including earnings for each calendar year that were taxed for Social Security and Medicare. Older earnings amounts are grouped by decade. This section also includes a phone number to call if there is an error in a worker’s earnings record.
  9. Estimated Pension Benefit — This information can be obtained with the assistance of human resources personnel, via an online account search, and/or from periodic statements provided by account custodians. 
  10. Amount Saved Already Saved for Retirement — This variable includes retirement savings held in Roth and/or traditional IRAs, 403(b)s and other retirement savings plans (e.g., a SEP, if self-employed), annuities, taxable accounts, and other earmarked assets. Once online calculators have this information, they can project what these assets will be worth at retirement age.
  11. Inflation Rate — Some calculators ask users to project an inflation rate over their entire saving and spending period. For context, the historical inflation rate from 1926-2022 was 2.9%. Recent inflation rates have been higher.
  12. Income Tax Rate — Some calculators ask users to list their current federal income tax rate (currently ranging from 10% to 37%) and an estimated income tax rate once they retire.
  13. Average Investment Return — Some retirement calculators assume an average annual return on retirement savings while others ask users to make a projection.

Other Retirement Calculator Inputs

Some calculators ask about employer matching that helps fund workers’ savings and/or the number of pay periods per year to divide annual savings into. For example, $7,000 of annual savings ÷ 26 pay periods =  a $270 payroll deduction (rounded). A final calculation that workers generally do themselves is to calculate the percentage of their pay that 403(b) savings equates to (e.g., $7,000 is about 11.7% of a $60,000 salary).

Changes in Household Expenses

An important aspect of retirement planning is accurately projecting household expenses in later life to input a number for Variable #2. Again, there is no “one budget fits all” as individuals and households have different values, goals, and expectations about how they will spend their time. Some people see their federal/state income taxes decrease with a drop in income while others have more taxable income than they had during their working years due to multiple income streams including required minimum distributions (RMDs).

In general, the following expenses decrease or are eliminated totally in retirement: gasoline (no commuting and work-related driving), union and professional organization dues, FICA tax (if no longer working), savings for retirement, housing (if mortgage is repaid) and disability insurance premiums. Conversely, the following expenses often increase in later life: travel (e.g., vacations and to visit family), entertainment, restaurant meals, philanthropy (charitable and family gifting), and medical and dental care.

Retirement Planning Calculators

Plan to do a retirement savings analysis with at least three calculators. Look for similarities and differences in their output and compile a range of responses (e.g., annual savings amount from $5,500 to $6,800). Before inputting data, collect current information about Social Security and pension benefits and the value of retirement savings accounts. Calculators worth trying include the following:

Best Retirement Calculator (Bankrate)
This calculator uses sliders for users to input data into eight fields for key variables.

Retirement Calculator (Calculator.net)
This calculator has eight required fields, with variables listed above, and three optional fields.

Retirement Calculator (Charles Schwab)
This calculator asks for over a dozen inputs and presents an analysis using text and bar graphs.

Retirement Calculator (FINRA)
This calculator includes 12 fields to input data and an option to adjust deposits for inflation.

Retirement Income Calculator (Vanguard)
This calculator uses a “fill in the blanks” format for users to input data for key variables listed above.

Life Expectancy Calculators

A key variable in any retirement calculator is life expectancy, for which users need to make estimates. The best life expectancy calculators ask questions about personal health habits (e.g., diet, exercise, and smoking). Calculators worth trying include the following:

Life Expectancy Calculator (Bankrate)
This calculator includes inputs for height, weight, blood pressure, family health and other personal factors.

Retirement and Survivors Benefits: Life Expectancy Calculator (Social Security)
This basic calculator asks only two questions (gender and date of birth) to indicate average life expectancy.

The Living to 100 Life Expectancy Calculator (Living to 100)
This calculator asks many questions about health-related behaviors that users have control over.

Research Results

Staff at the American Association of Individual Investors (AAII) examined differences in output from retirement savings calculators from ten sources. Three “personas” were tested in this study: early- and mid-career and near-retirement. They found many differences in both the data inputs that each calculator requested and the output that they provided. Given these substantial differences in online calculators, it is wise to apply the “Rule of Three,” use at least three calculators to estimate retirement savings need and compare outputs to determine a reasonable range of numbers with which to make decisions.

Each year, the Employee Benefit Research Institute (EBRI) Retirement Confidence Survey (RCS) examines workers’ preparation for retirement. According to the 2023 survey, half (51%) of respondents reported that they and/or their spouse have tried to calculate how much money they need to save to live comfortably in retirement. Workers with a retirement savings plan, such as a 403(b), are significantly more likely than those without a plan to have tried a calculation.

Three (More) Things

  • Some people postpone retirement savings because they mistakenly believe these myths: my spouse will support me, my children will support me, I won’t need much to live on, and it’s too early to start saving.
     
  • A general guideline, based on the 4% Rule, is to save $300,000 for every $1,000 of monthly income needed to supplement guaranteed income sources; 4% of $300,000 is $12,000/year and $1,000/month.
     
  • Personal calculations are much better than general guidelines because personal values, planned activities in later life, and retirement resources (e.g., pension, retiree health insurance) vary widely.

Six Smart Strategies

No. 1: Learn the Benchmarks — Several investment firms have retirement savings benchmarks (as a multiple of income) by age, with different assumptions underlying their recommendations. For example, T. Rowe Price recommends 7x to 13.5 x salary saved at age 65 and Fidelity recommends 10x a worker’s salary at age 67.

No. 2: Check Your Benefits — Accurate retirement savings calculations require dollar amounts for future Social Security and pension benefits. Pull information about guaranteed income sources and other data inputs before starting an analysis.

No. 3: Calculate Net Worth — An easy way to tally the value of existing retirement savings accounts is to transfer the information from a current net worth statement (assets minus debts).

No. 4: FIRE Up CarefullyThe Financial Independence Retire Early (FIRE) movement espouses aggressive savings in young adulthood to fund exiting a 9 to 5 job by mid-life. FIRE is more costly than retirement at later ages because there will be many more non-working years of expenses to cover.

No. 5: Do a Pro Forma Budget — In addition to calculators, another retirement planning method is a Pro Forma budget (i.e., a projected budget for future income and expenses). The closer someone is to retirement age, the more accurate it is likely to be.

No. 6: Expect Change — Retirement planning is dynamic process. Someone’s daily activities and interests and abilities are likely to be different at age 85 vs. age 65 with implications for spending, investing, and other aspects of personal finance.

In Summary

403(b) savings should not be done in a vacuum. Rather, it should be part of a data-driven financial planning strategy to accumulate sufficient funds to maintain a comfortable lifestyle, perhaps for many decades.

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Dr. O'Neill is the owner/CEO of Money Talk: Financial Planning Seminars and Publications where she writes, speaks, and reviews content about personal finance. She is a Distinguished Professor Emeritus at Rutgers University and a long-time 403(b) plan participant.

Related Podcast:

Fin Lit Royalty Dr. Barbara O'Neill has made huge contributions to the financial literacy movement. Listen Now »