Calculating your retirement nest egg

Source: CRANKY CONSUMER By ANDREA COOMBES of Wsj.com

There are many online retirement calculators will tell you how much you need to save for retirement.

However, these calculators almost always over-estimate the amount that you need to save now. If you follow the suggestions, the savings for retirement may impact your current quality of living.

The parameters require for retirement calculators:

1) Rate of inflation - 3% is popular
2) Rate of return - 6% is popular too
3) Years in retirement - 25 years to 35 years
4) Living expenses in retirement - 70% to 80% of pre-retirement expenses
5) When will you retire? - 65

Most calculators are over-estimated the rate of inflation, but under-estimated the rate of return on your retirement nest egg.

Remember, if the rate of inflation is 2.5% instead of 3.0%, the error is 20%!

If the average rate of return is 8% instead of 6%, that is 25% for the error!