Regardless of where you are in your financial journey, it’s important to know certain information about your retirement planning — especially if your goal is financial independence and early retirement.
You need to calculate things like…
- Whether you’re on track to retire at your desired age.
- If not, how much longer you’ll have to work if you keep up your current pace of saving.
- In either case, the chance that you’ll run out of money during retirement.
Accurate answers to these questions are essential, in part because they tell you whether you need to make an adjustment or change course.
But the calculations can be complex, even if your finances themselves aren’t very complicated. That’s why a high-quality financial independence or retirement calculator can be immensely valuable.
In this article, I highlight three financial independence calculators that can help you make better decisions today and avoid unwelcome surprises in the future.
#1. The OG Early Retirement Calculator: A Pen and Graph Paper
Best for: Those just starting their journey towards financial independence.
A general rule of thumb when it comes to financial independence is that you can withdraw 4% of your portfolio every year.
For example, if you have $1 million in your portfolio, your safe withdrawal rate would be $40,000 per year.
By limiting withdrawals to 4% and investing the rest wisely, there’s a very low chance (if any) that you’ll run out of money.
This number isn’t perfect, but it’s close enough for a quick calculation. It’s also useful for everyone — not just those knocking on the door of financial independence.
Personally, I use the 4% rule (also known as the 25X rule) almost daily to help me make better financial decisions. This is because you can invert the equation and multiply each annual expense by 25 to determine how much more you’d need to save to offset that spending.
For example, say you’re considering signing up for cable TV and high-speed internet as a package for $150 per month ($1,800 per year).
Here’s what you now know, thanks to the 4% withdrawal rule: any additional annual expense can be multiplied by 25 to determine how much more you’d need to save for retirement.
In this case, you would need to accumulate $45,000 ($1,800 X 25) more to pay for this expense during retirement.
Understanding how the 4% works is vital for determining when you can reach financial independence, and you don’t need a fancy calculator to run the numbers.
All you need to know is:
- Your total retirement savings.
- Your annual expenses.
Then, take your annual expenses and multiply them by 25. For example, if your annual expenses are $40,000, your benchmark is $1 million. If your savings exceed $1 million, you’ve hit financial independence.
If you’re just beginning your journey, it’s not necessary to take a deep dive using Monte Carlo simulations (which I discuss in the next section). Just focus on increasing your savings rate while taking into consideration the impact of adding additional annual expenses on your ability to reach FI.
For extra credit, take a tactic from the book Your Money or Your Life (which has helped many people reach early retirement) and track your progress by using a crossover chart. Learn how to create your own chart here.
Note: The 4% rule comes from research known as the Trinity Study. While there are some criticisms of the figure, it’s sound overall and serves as a great target for people just beginning their journey towards financial independence.
#2. Personal Capital’s Retirement Planner
Best for: People who have less than 10 years to reach financial independence.
When you’re close to reaching financial independence, no rule of thumb will be sufficiently reassuring. After all, you want to be 100% certain that you have enough money to live off of for the rest of your life.
With Personal Capital’s free retirement planner, you’ll know exactly where you stand on your journey to financial independence. It’s the most accurate and easy-to-use retirement calculator out of the dozens I’ve tried.
Here are some of the reasons why I like it:
- It uses real data. When you join Personal Capital, you have the ability to link virtually all of your financial accounts — checking, savings 401(k), and everything else. This enables the retirement planner to use your actual savings and spending figures, rather than estimates, which produces more accurate projections.
- It runs a Monte Carlo simulation, which is essentially 5,000 micro-simulations that utilize different time horizons to project your likelihood of a successful retirement. This is much more powerful and accurate than assuming a steady 7% rate of return (the historical market benchmark), which fails to account for potential peaks, valleys and worst-case scenarios.
- It allows for customization. Not all financial independence calculators allow you to insert variables, such as other retirement income like real estate, passive income, inflation rate, and social security. This means you could theoretically test hundreds of hypothetical scenarios with the tool — like what would happen if you increased your savings by 10% per year, or if you committed to working part-time for $15,000 per year during retirement.
Here’s a screenshot from my own Personal Capital account.
It calculates that I have an 88% chance my portfolio will support my goals based on my desired retirement age of 45, my current investments, and my annual spending.
Since I have a few outside, private investments that are not reflected in Personal Capital, this number isn’t totally accurate. However, this is incredibly helpful to know today, and even more helpful to track over time.
Beyond this informative feature, another valuable tool offered by Personal Capital is “Investment Checkup.”
When I log into the tool, I see a screen that says:
As you can see, since I keep most of my money in stock index funds (primarily Vanguard’s Target Date 2050) my allocations are fairly close to what Personal Capital recommends.
Personal Capital’s asset allocation algorithms are quite good. Even if you don’t know the first thing about investing, following their recommendations will lead you to outperform the vast majority of investors.
Best for: Those looking for a quick way to see how their portfolio would have fared historically
What if you had decided to retire right before the 2008 recession? What about right before the Great Depression? Would your money have survived?
FIRECalc is a comprehensive financial independence calculator that runs simulations using stock market history.
To start, you can run a simulation based on three inputs:
As an example, I inserted:
- Spending: $48,000
- Portfolio: $1 million
- Years: 50
FireCalc then provided me with the following data:
FIRECalc looked at the 96 possible 50 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 96 cycles. The lowest and highest portfolio balance at the end of your retirement was $-4,827,837 to $15,004,621, with an average at the end of $1,501,648. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 50 years. FIRECalc found that 40 cycles failed, for a success rate of 58.3%.
With this number in hand, you can start to play around with other variables, such as:
- Social Security and other income (such as pensions)
- Delaying retirement
FIRECalc is similar to Personal Capital’s retirement planner, which is slicker, easier to use and more feature-rich. However, FIRECalc doesn’t require you to link your financial accounts, which may be helpful if you’re just starting out and don’t yet have much of an investment profile.
Free Financial Independence Calculator
A good financial independence calculator, like Personal Capital’s retirement income planner, can make balancing dozens of variables and unknown outcomes easy (or at least easier). Having used dozens of calculators and spreadsheets, the three above are my favorite.