• Ballpark Estimate (ChoosetoSave.org)
• Retirability Check (Nationwide) – I profiled this calculator last October.
• AARP’s Calculator
• myPlan (Fidelity) – Only 5 questions
• myPlan Retirement Quick Check (Fidelity) – Takes 30 minutes!

To their list, I would like to add:

TIAA-CREF:

• Retirement Goal Evaluator
• Asset Allocation Evaluator
• Supplemental After-Tax Annuity Contributions Calculator

T. Rowe Price:

• Retirement Income Calculator – How much will you really need once you’ve retired, and what are your chances of meeting your goals? The Retirement Income Calculator shows how market uncertainty affects your retirement income strategy.
• Retirement Planning Worksheet – This worksheet gives you a quick estimate of amount of money you’re likely to need for retirement.
• Rollover IRA Distribution Calculator – Based on information you provide, the T. Rowe Price Distribution Calculator shows the cost of taking an immediate cash distribution versus keeping your money in a tax-deferred account.
• Company Stock Tool – Use this tool to compare the tax consequences and long-term value of rolling over company stock to a Rollover IRA versus taking a distribution of stock into a taxable account.
• Small Plans Contribution Calculator – Business owners can calculate contribution amounts to SEP-IRA, Individual 401(k) and Keogh plans.
• SIMPLE IRA Calculator – Business owners and employees who participate in a SIMPLE IRA plan can use this tool to calculate contribution amounts and tax savings.
• 403(b) Contribution Calculator – Use this tool as a guide to determine the maximum amount you can contribute to your 403(b) account.

Vanguard:

• Give your portfolio an online checkup – Set your goals, get advice on investments, and forecast your chances of success with Financial Engines. Available as a complimentary service to investors with $100,000 or more in assets.
• Determine how much to save for retirement – Do you know how much your retirement savings will be worth at age 65? This tool can help you set a monthly savings goal.
• Why it pays to start saving early for retirement – Learn how much easier it will be to meet your retirement savings goal if you start now.
• What kind of IRA is best for me? – Find out which type of IRA—traditional or Roth—best suits your needs.
• Should I convert my IRA to a Roth? – Should you pay taxes now or later? This calculator can help you decide.
• The cost of cashing out of my employer plan – Compare the consequences of taking a cash distribution with the benefits of a direct rollover.
• Should I roll over company stock? – Find out which options for your company stock are best for you if you change jobs or retire.
• How investment costs affect my retirement spending – See how keeping your investment costs low can translate into more spending money.
• Plan for a long retirement – Use our interactive illustration to see your chances of living up to 30 years or more in retirement.
• Vanguard Lifetime Spending Analyzer™ – Estimate how long your tax-deferred retirement assets could last if you started using them now.
• Retirement expenses worksheet – Use our worksheet to create a realistic budget for retirement that includes basic and discretionary expenses.
• Retirement income worksheet – Use our worksheet to determine your sources of retirement income.
• How much can I withdraw in retirement? – Estimate how much you may be able to withdraw each month from your retirement portfolio.
• Estimate your required minimum distributions in retirement – Learn how RMDs work and how to calculate your RMD withdrawal.

The Scottrade Retirement Center:

Beneficiary Planners

• Beneficiary Options Calculator – Review the options available for all types of beneficiaries to determine which will best assist you in maximizing tax deferrals and minimizing RMDs.
• Payout Projections Calculator – The RMD Projector is designed to assist beneficiaries of deceased IRA holders in projecting future required distributions from the decedent’s IRA.
• Beneficiary Payout Calculator – The RMD Calculator is designed to assist beneficiaries of deceased IRA holders in calculating required distributions from the decedent’s IRA.

Early Payout Planners (IRC Sec. 72(t))

• Comparison Projector Calculator – Use this tool to compare the three basic “substantially equal periodic payment” structures authorized by the IRS for avoiding the 10% early distribution penalty.
• Distribution Calculator – After you’ve selected a payment method, use this tool to structure your substantially equal periodic payment plan.

IRA Eligibility Calculator

IRA Selector Tools

• Basic Comparison Calculator – This straightforward tool helps you compare Traditional and Roth IRAs on the basis of projected (after-tax) retirement income.
• Legacy Planning Calculator – This tool helps you measure the potential wealth accumulation implications of selecting a Traditional or Roth IRA (for you and your beneficiaries).
• Breakeven Analysis Calculator – Unsure of what your tax rates will be in 20 years? This unique tool helps you look at IRA selection from the standpoint of breakeven analysis (e.g. what if my effective tax rate in retirement is 30% rather than 25%?).

Required Minimum Distribution (RMD) Planners

• Comparison Projector Calculator – The RMD Projector is designed to project future required distributions.
• Distribution Calculator – The RMD Calculator is designed to calculate required distributions.

Rollover Planners

• Plan Participant Calculator – Receiving a lump sum distribution from an employer-sponsored retirement plan? This tool will help you identify the tax options available to you and compare the retirement income implications of your various alternatives.
• Beneficiary Rollover Planner – Are you a beneficiary receiving a lump sum distribution from an employer-sponsored retirement plan? This tool will help you identify the tax options available to you and compare the retirement income implications of your various alternatives.

Roth IRA Conversion Tools

• Basic Conversion Calculator – This straightforward tool helps you quantify the potential benefits of a Roth IRA conversion on the basis of projected (after-tax) retirement income.
• Legacy Planning Calculator – This tool helps you meaure the potential wealth accumulation implications of selecting a Roth IRA conversion (for you and your beneficiaries).
• Breakeven Analysis Calculator – Unsure of what your tax rates will be in 20 years? This unique tool helps you look at a potentional Roth IRA conversion from the standpoint of breakeven analysis (e.g. what if my effective tax rate in retirement is 30% rather than 25%?).

All of the above calculators can be found here.

TD Ameritrade:

• Disability Income Calculator – See the effect disability can have on your financial future.
• Early Payout Planner – View how much money you would net, after tax and penalties, if you cashed in your retirement savings plan early.
• IRA Planner – Analyze whether a Roth or traditional IRA may be best for an individual’s unique circumstances.
• Life Insurance Calculator – Calculate how much life insurance you may need based on your current financial situation.
• Personal Net Worth Calculator – Find out how much you are worth with this simple net worth calculator, which will help you tally your assets and liabilities, and calculate your debt ratio.
• Required Minimum Distribution Calculator – Calculate the amount of mandatory withdrawals from IRAs after age 70 ½.
• Retirement Planner – Calculate a retirement savings goal based on current income and the amount to be invested each year to pursue that goal for a given rate of return.
• Savings Gap Calculator – Evaluate whether or not your savings are on track to meet your retirement income needs.
• The Cost of Waiting Calculator – Calculate how much more you’ll need to contribute each year to reach your retirement goal if you put off saving for retirement.
• Time Value Calculator – Calculate the value of compound returns for different time periods and rates of return.

I plan to add to this list as I find new calculators and tools. If you know of any that I have missed, please let me know and I’ll add them.

I found The Top 5 Reasons to Pay Off Your Mortgage via Debt Blitzkrieg. I found most of the five “reasons” to be quite weak. Here’s their top five reasons to pay off your mortgage along with my response:

1. It’s money in your pocket.

Although the post’s author doesn’t come right out and say it, I have to assume that they are talking about paying off a mortgage as quickly as possible. This means using resources above and beyond those necessary to meet the monthly mortgage payment. The author even references the fact that some “financial experts” recommend paying off the mortgage BEFORE investing in your 401(k) or other retirement plan. This is very poor advice.

The fact of the matter is that to pay off your mortgage early requires a choice. You have to decide what is the best use of your money. Most of us have limited resources. We simply don’t have enough money to do everything we would like to do. Therefore we have to ask ourselves whether or not it makes sense to plow our extra resources into something that has historically not performed much better than a treasury bill? Not only that, part of that performance – the increase in the price of your house over time – you will receive whether you have a mortgage or not.

I’m not against paying off a mortgage. I just think people need to look at the interest rate they are paying and compare that with the return they could get elsewhere. If you have an extremely low mortgage rate, then it makes perfectly logical sense to invest any extra money in something other than paying down the mortgage more quickly than you have to.

2. You’ll save thousands of dollars in interest.

This is one of the biggest arguments for paying off a mortgage early. Unfortunately, they aren’t presenting the full picture because they totally leave out the opportunity cost of paying off the mortgage early. Sure, you may “save” yourself thousands of dollars in interest expense but what did you miss out on by NOT investing your money elsewhere? It’s a legitimate question that they didn’t answer. You can run the numbers for yourself by using my Mortgage Comparisons XL calculator. You can use the interest rates found on the HSH Associates website (at this writing, the national average for a 15-year fixed mortgage is 5.95% and a 6.27% for a 30-year fixed). Simply ignoring the opportunity cost doesn’t present the big picture.

If you have a mortgage with a high interest rate (I’m thinking anything over 8%), then it makes sense to pay off the mortgage as quickly as possible as long as you have a solid plan.

3. You’ll save money on the costs associated with a mortgage.

They refer to disability coverage and life insurance to pay off the mortgage should you get injured or die prematurely. Okay, I’ll give them this one. However, although I haven’t done the math on this one, I can’t imagine the insurance costing that much more.

4. You’ll have a large and valuable belonging that protects you from financial disaster.

Really? If times get tough because you have lost your job and your cash flow is bad, I wouldn’t count on being able to borrow against your house to pay bills. Why? Because banks want you to pay back your loan, which you can’t do if you don’t have income. Sure, you could sell your house and use the equity to pay your bills. However, this is risky too because what if you can’t sell your house? I would much rather have assets outside of my home’s equity to help me through tough times.

5. Satisfaction.

That’s their fifth reason for paying off your mortgage. Maybe so. Personally, I would be more satisfied taking my time paying off the mortgage while building my assets elsewhere. In other words, I would be satisfied having a larger net worth than simply having my house paid off.

Still not convinced? Then take a minute to read some of the other posts I have written on this topic:

More on Mortgages (from May 8, 2007)

Which is Better: a 15-Year or 30-Year Mortgage?

She’s right. My wife drives a lot of miles and according to my calculator, gas at $4 would cost us an additional $2,000 per year (based on the current price of $2.72). We would have to make adjustments to our budget in order for to afford the higher price. We would most likely have to cut our eating out budget or quit contributing to our 401(k) (I’M TEASING!).

Anyway, I thought it would be interesting to hear from you.

On the other hand it would be interesting to see where you’d be if you paid off that mortgage in 25, 20, 15, 10 and 5 years instead of either 30 year option, and then invested the full payment each month of the remaining 30 years.

My response:

Actually, I already detailed this in A Follow-up to the Dave Ramsey Mortgage Post – This is Interesting! It all boils down to allocation of funds. Even thought you may pay off a debt sooner, doing so requires you to use funds that could be used somewhere else. In other words, if you pay an extra $500 per month on your mortgage, you’ll pay it off sooner but you’ll be using $500 per month that could have been allocated elsewhere.

If the market returns 10% per year while you’re paying off your 6% mortgage early, you’re missing out on that 4% difference. Yes, there’s an “if.” We simply do not know what the market will return in the future. However, over the long-run, the stats are pretty convincing.

Related:

Mortgage Comparison Calculator XL

30-Year Fixed-Rate Mortgage

Using this calculator, you can see that the payment on a $200,000, 30-year fixed rate mortgage at 6.30% would be $1,238 (or $1,237.95 to be exact). Beginning with the very first payment, a very small portion of the payment will go towards the principal of the loan and a very BIG portion of the payment will go to pay interest as the graphic below shows:

Notice that the beginning balance for the second month is smaller than the beginning balance from the previous month. That’s because a portion of your payment is going towards the principal. As you continue to pay on your mortgage, the percentage of each payment that goes towards interest will decrease while the amount going towards the principal will increase. Towards the end of the mortgage term, most of the payment will go towards principal and very little will go towards interest. For more on how the math of a mortgage works, see this post I wrote last year.

Pretty simple stuff. Now let’s look at an interest-only mortgage.

30-Year Fixed Rate Mortgage With a 15-Year Interest-Only Period

An interest-only loan is essentially two loans rolled into one. For example: a 30-year fixed rate mortgage with a 15-year interest-only period works out to two 15-year loans. As we calculated in the first example, the interest amount on the first payment is $1,050. With an interest-only mortgage, your initial payment would be $1,050, which is $187.95 smaller than the traditional payment:

Notice that because all you are paying is interest, your loan amount stays the same. In other words, you pay each month but you don’t make any progress on actually paying off the loan. This would continue for 180 payments (15 years). At the end of 15 years, you will still owe $200,000 on your mortgage. In order to pay off that mortgage in the next 15 years, you will have to pay substantially more each month. How much more? Well, you can calculate it yourself using this calculator. For the input, use 15 years, 6.30% interest rate, $200,000 for amount borrowed. You should get $1,720 ($1,720.30 to be precise) or $670 MORE per month! You’ll then have to pay $1,720 per month for the next 15 years (180 months).

What About Equity?

Equity in a house comes from two sources:

1. The amount of each payment that goes towards principal. At the end of 15 years, the traditional mortgage would have built up an equity position of $56,078. You would have built no equity position from payments with the IO mortgage.

2. The appreciation in the value of the home. In the example, if the home appreciates at 3% per year, at the end of 15 years, it will be worth $311,594.

With the traditional 30-year fixed mortgage, at the end of 15 years, you will have an equity position of $167,672 [$56,078 equity built up in the mortgage + $111,594 appreciation in the value of the home). With the IO mortgage, your equity-position will just be the increase in the value of the home ($111,594). NOTE: There’s NO GUARANTEE that the house will appreciate in value. Some areas of the U.S. have experienced price declines, which put some people in negative equity positions (not a good thing!).

At the End of 30 Years

As you can see from the graphic below, the interest-only mortgage carries with it significantly more in interest charges. However, this doesn’t tell the whole story as it leaves out the potential growth in the payment difference and the tax deductibility of the interest (more on this in a future post).

At first glance, the IO mortgage does not appear to be that great of a deal. You’re only “saving” $187 per month and that only lasts for a while. If you can’t afford the $187 difference, should you be buying the house? Good question.

More on this later…

81% of the pollsters think a 15-year mortgage is the best choice?

Being that it is on the Dave Ramsey website, these results don’t really surprise me. And, I suppose if you are looking at just the amount of interest paid, then yes, the 15-year mortgage wins. However, I think this is an awfully simplistic way to look at things because it totally leaves out the opporunity cost of going with the 15-year mortgage.

Remember the old saying that the A. L. Williams Insurance sales guys used to say, “Buy term and invest the difference?” Well, I have a saying when it comes to mortgages:

If the rates are right,…

According to my conservative numbers, you’ll come out about $90,000 ahead over 30 years. To compute that number, I used the following numbers:

6.08% APR for 15-year fixed mortgage (found on HSH Associates)
6.30% APR for 30-year fixed mortgage (found on HSH Associates)
8.00% Annual ROR on investments
3.00% Annual appreciation on the house

Then, I simply plugged the numbers into my Mortgage Comparison XL Calculator, and came up with the following:

Oh, and my results don’t even take into account the tax-deductibility of mortgage interest. So is a 15-year mortgage really a better deal?

So, let’s begin…

First we’ll look at the total returns through 2006 for various indexes (asset classes) found in the Callan Periodic Table of Investment Returns:

Here’s the asset class that each index represents:

MSCI EAFE – International
S&P 500 Index – Domestic Large-Cap Stocks
Russell 2000 Value Index – Domestic Small-Cap Value Stocks
LB Agg Bond Index – Investment-Grade Bonds

I realize that there is no midcap index. We’ll just do without it for this example.

Now we’ll decide what percentage of the portfolio should be allocated to each asset class. It’s easy to look at the above chart and just pick out the indexes with the best returns. That’s not the way to do it! Why? Because that graphic does not show you the volatility that the index contains. Without getting into the specifics (food for another post), here’s how the asset classes rank in volatility (from least to most):

LB Agg Bond Index – Investment-Grade Bonds
S&P 500 Index – Domestic Large-Cap Stocks
Russell 2000 Value Index – Domestic Small-Cap Value Stocks
MSCI EAFE – International

Your asset allocation will depend on factors like your age, time horizon, risk tolerance (I hate that term), and other various factors. All this makes asset allocation a very personal choice. What’s right for me may or may not be right for you.

So,… here’s how we can use the information we have covered so far to estimate the total return on a portfolio:

Let’s say you have decided that you want the following allocation:

30% – Large-Cap Stocks – S&P 500 Index
30% – International – MSCI EAFE
30% – Small-Cap Value – Russell 2000 Value
10% – Bonds – LB Agg Bond Index

Using the 20-year returns from the chart above, we’ll construct the following portfolio:

As the graphic suggests, you take the percentage allocation times the expected return of the asset class to estimate that asset’s impact on the portfolio. You repeat this for each of the asset classes. Then you simply sum those returns as I did in the last column to get an idea of how a particular portfolio will perform. If you are interested, you can download a simple spreadsheet I put together. You can then play around with it by making changes to the allocations and expected returns to see their impacts on the total portfolio. You can also use my Portfolio Tool that I recently created.

If you took the time to read this post, you now have a understanding of how to construct a portfolio and how expected returns impact the return of the entire portfolio. Isn’t learning fun?

1. The amount invested
2. The number of years the money will be invested
3. The asset allocation of the portfolio in percentage form (the total MUST equal 100.00% in order for it to work correctly)

It will then show you how much the portfolio “could” be worth at the end of the number of years you entered.

Now, here’s a few of things you must understand about this calculator:

1. The returns used are the total returns over the last 20 years (1987 – 2006) as expressed in the Callan Table. For a look at the annual returns for the indexes, click here. Also, the returns over the last 20-years can be drastically different than the returns over the last few years. However, over the long-run, returns seem to revert back to average.

2. The calculator only allows for lump sum investing and DOES NOT rebalance annually.

3. The calculator does not reflect any sort of expenses since the underlying investments are the indexes themselves. In other words, the returns in the real world couldn’t be quite that high due to expenses.

I guess what I’m trying to say is my calculator isn’t perfect! However, it will give you a good idea of how different investment classes work together in a portfolio.

Now, you’re ready to try it out!

This post was inspired by the following comment I received from a reader:

This (and most of your other entires, and the PF community) have got me thinking about starting a Roth IRA for that lovely compounding interest (I’m only 19!). But when I contacted my bank (ING), they were utterly unhelpful. They said, okay, pick what funds you want to invest in, and how many shares of each and we’ll set it all up. Do you have any advice on what I should do without knowing my current financial situation? My rundown is: I have about 1,000 in savings, very little cc debt, and my student loans are locked in at low interest rates that I won’t have to pay off for years. I’m planning on starting out with $100 and adding 25-50 a month.

Although I can’t recommend a specific company or mutual fund to invest in, I will say to check out Vanguard and T. Rowe Price as both are stellar companies. You also might want to read this post from yesterday.

Her comment got me to thinking. At first glance, $50 per month doesn’t sound like much. It works out to be about $1.67 per day. However, don’t let the small amount fool you. Given enough time, $50 per month can grow into a substantial amount. Take a look at the three graphics and you’ll see what I mean. Don’t let all the numbers scare you away. The graphics are divided up based on the expected rate of return of 8, 10, and 12 percent. I used 19 as the starting age since that is the age of the commenter. Even at an 8% rate of return, $50 per month could grow to more $286,000 by age 65.

You can click on each graphic to see it larger.

Now keep in mind that these numbers were reached using a straight-line rate of return, which never occurs in the real world. Nor do these numbers reflect inflation, which will reduce the real value of the account at retirement. So, although $50 per month can grow into a substantial amount over a lifetime, it would be best to invest more if you can afford it.

Oh, and for those who want to play around with the numbers themselves, feel free to download the Excel file I used for this post.

Nationwide has developed a new software program that will allow people to get a sense of where they are in their ability to retire. The program is called RetirAbility Check. Although I did find the exercise relatively easy to go through, I thought the “cute” characters were annoying. I turned the sound off but they still stood there and made faces and moved around, which I thought was distracting. but, I finished the exercise and found out my R-Score in about 6 minutes. I urge you to go to Nationwide’s website and try this tool out and then come back here and tell me what your score is. Here’s my score:

According to Nationwide, the goal is to have a number that is greater than 100 no matter what your age. I’m happy that our number is 154, which means that we are on track to have 154% of our current standard of living during retirement. So that’s good news, I guess. I still want to increase the amount that we are saving.

Now, go get your score and report back here ASAP!