What You Need to Know About Retirement Projections

Ever wonder how much money you should be saving for retirement?

When you Google the question, most of the results are cut and dry: most experts say you should save between 10% and 15% of your income, according to Nerdwallet. Fidelity's rule of thumb is 1x your annual income by age 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67.

But the truth is that the answer is much more complicated than these rules. Your ability to retire is dependent on a litany of factors including your anticipated expenses (which depend on whether you own a home), your age, your expected social security payout, your investment mix, and your debt. There are also factors outside of your control, like interest rates and investment returns, that could affect your ability to retire.

So what's a financially savvy babe to do? Crunch the numbers, of course.

One way you can do this is to use a Monte Carlo simulation, which is a mathematical analysis for risk assessment. The analysis can use the factors listed above, along with other assumptions and standard deviations to show you the likelihood of achieving a financial goal. In other words, it's a way to run the numbers to see if you can retire on time.

This analysis isn't fool-proof. Its critics say that it may not account for market anomalies like big crashes or market turbulence. However, it can offer some clarity and can help you see the value in making different life choices, like retiring later or buying a house in your 30s.

You don't have to be a mathematician to run a Monte Carlo simulation for yourself. Vanguard has a relatively basic version of this calculator available, and you don't need to input any account information to do it.

I personally use Personal Capital's free software program, which not only offers budgeting and net worth calculations but also runs a relatively personalized version of this analysis. You first link all of your accounts to the app, including investments and loans. Then, on the retirement planning page, you'll see an "official plan," which is the Monte Carlo simulation performed by the program, without you changing any inputs.

According to the site, the simulation incorporates "expected return and volatility, annual savings, income, spending goals, retirement spending, social security, and tax rules for taxable, tax-deferred, and tax-free investment accounts." What is nice about this program is that you can go in and adjust each of these assumptions, including the age at which you take social security or your expected expenses in retirement.

The program also offers recommendations on the changes you could make to improve your chances of retirement. However, many of these suggestions do suggest that users invest via Personal Capital's wealth management business. I'm not doing that, but it's an option if you're interested. (full disclosure: I have not been paid by Personal Capital, nor do I use affiliate links for them!)

Another way you can access a Monte Carlo analysis is via a financial planner, who will be able to clearly explain the implications of this analysis and may have access to more sophisticated software. (Brooklyn Plans, where I work part-time as a financial coach, is an excellent option!)

With all of these options, remember that a Monte Carlo simulation is not foolproof. While it can help you analyze your options, it's based on projections and probabilities. It can't predict the future, and neither can we. It's just another financial tool in our tool belt that we can use to position ourselves better moving forward.