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Nothing will bring clarity to your retirement planning like a retirement calculator. These calculators will help you estimate the level of monthly savings necessary to make it to retirement and can also help you predict how your investments can boost retirement returns.
Setting retirement goals
When it comes to retirement planning, it's hard to meet goals you haven't set. Arriving at a ballpark figure for total retirement savings is easy with a retirement calculator. Some of them can even help you estimate your retirement income needs on a monthly basis.
In order to calculate how much income you'll need in retirement, get a handle on your current spending. While some retirees find their budget shrinks during retirement, others say that they spend more on leisure activities and travel, at least in the early years.
Sources of income
Social Security typically provides part of a retiree's monthly income. Estimating how much income you may have from Social Security can assist in approximating the amount of money you'll need to save in dedicated retirement accounts such as 401(k)s and IRAs.
A 401(k) is a retirement plan offered by a private-sector employer. The equivalent for teachers and some non-profit employees is the 403(b). A 457 plan is offered to government workers.
An IRA, or individual retirement account, is a tax-advantaged account that savers open on their own through a bank, credit union or brokerage.
The IRS adjusts the limit savers can contribute to retirement each year, but in general, the contribution limit for an IRA is about a third of what can be contributed to a workplace plan.
Types of retirement accounts
In general, contributions to retirement accounts can be made pre-tax, as in a 401(k) or a traditional IRA. Contributions to a traditional IRA qualify for a tax deduction for the year the contribution was made. Contributions to workplace plans typically go in on a pre-tax basis, which means the employer puts it into the account before including it with taxable income. After age 59 1/2, contributions and earnings can be withdrawn without penalty but will be taxed as regular income.
Withdrawals before age 59 1/2 are subject to a 10 percent penalty with a few exceptions.
In the Roth version of IRAs and 401(k) plans, contributions are made after taxes are paid. At retirement, also after age 59 1/2 contributions and earnings can be withdrawn tax-free.