Determining when to retire is a very difficult task. A variety of free retirement calculators are available online that allow users to analyze retirement strategies.

However, these retirement calculators are not all built alike. Different retirement calculators require different information that effects the calculation quality.
 
Key Characteristics of a Good Retirement Calculator
While almost all of the free online retirement calculators will provide a good general retirement statratgy analysis, certain characteristics make some retirement calculators superior.

1. Monte Carlo Simulation
A Monte Carlo simulation utilizes random variables and tests multiple scenarios to calculate the probability of certain outcomes. In investing, a Monte Carlo simulation would test potential returns of a portfolio in thousands of unique scenarios and compute the probability of specific outcomes.Traditional retirement planning calculators normally ask the user to input an expected rate of return. Then the portfolio is compounded at that rate consistently. In reality, investments exhibit substantial volatility. While equities may return about 10% historically, an equities portfolio has significant downside risk on a year to year basis. By utilizing a Monte Carlo simulation, this return variability can be better accounted for during the thousands of trials.

When planning for retirement, it is important to consider negative scenarios. For example, a multi-year recession at the start of retirement can be very damaging to someone forced to withdraw money at low prices. Retirement calculators that utilize a Monte Carlo simulation can help to account for these negative possibilities caused by short term investment volatility.

Although the Monte Carlo simulation provides a good approximation of likely outcomes, the simulation cannot cannot account for all unlikely events. For example, the 1987 stock market crash would have only been simulation by a Monte Carlo simulation with over 100,000 trials. Normal Monte Carlo simulations use significantly fewer trials. Even with this limitation, the Monte Carlo simulation provides a much more realistic view of possible returns then analysis based on constant investment returns.

2. Different Portfolio Returns
Most people change the asset allocation of their portfolio over time to reduce risk before and during retirement. Many retirement calculators, however, only ask for one portfolio return. This can be significantly misleading as expected returns in retirement may be lower than expected returns during the early investing stage.

3. Impact of Taxes
Many retirement calculators require the user to input their current savings and expected future savings. These retirement calculators fail to account for the different types of accounts investors use. For example, an investor may have taxable, tax deferred, and tax free investment accounts. A basic retirement calculator that fails to account for the different tax treatment of these accounts would not as accurately return retirement information.

4. Social Security
While many Americans are skeptical about the future of Social Security, it provides a substantial amount of retirement income for many Americans. Some retirement calculators, however, fail to account for Social Security payments during retirement.

5. Wage Inflation
Many retirement calculators either ask the user to input savings as a percentage of annual income, or ask the user to input the desired retirement income as a percentage of current salary. It is important to include expected annual income increases so these calculations reflect the reality of increasing wages over time.

Basic Free Retirement Calculator Reviews
Most major finance and investing sites or mutual fund companies (MSN Money, Lincoln Financial, and CNN Money) have basic retirement calculators. Many of these calculators fail to provide some of the important factors above, especially the Monte Carlo simulation. However, theses basic retirement calculators can provide a good way to quickly determine if a retirement plan is on track. Bloomberg has a very good retirement calculator. This calculator includes a varitety of inputs.

Another good basic retirement calculator is at i-orp.com. This calculator may not be the most user friendly, but it offers a wide variety of inputs for both the user and a spouse. This calculator also returns a detailed report.

Best Free Advanced Retirement Calculators
The major factor that separates the basic retirement calculator from the advanced retirement calculator is the use of the Monte Carlo simulation. Our favorite free advanced retirement calculator can be found at flexible retirement planner. This retirement calculator includes all of the imporant key characteristics, including the Monte Carlo simulation. It also includes additional inputs that allow users to enter specific income or expenses (such as college tuition, pension income, or vacations) during specific times.

Another good advanced retirement calculator can be found at FireCalc. Like the previous retirement calculator, this calculator has many of the important key characteristics. It also has many other unique input options, such as the ability to enter financial information about a spouse. Unlike the flexible retirement planner calculator, the FireCalc does not use a Monte Carlo simulation. Instead, the calculator analyzes outcomes based on historical return data since 1871. For example, the calculator would analyze how frequently a retirement strategy would have been successful if you retired in 1921, in 1922, in 1923, and so on. While this advanced retirement calculator lacks the ability to run thousands of trials tested by a Monte Carlo simulation, it allows the user to view the success of retirement strategies in real historic market situations. This method includes the impact of dramatic low frequency events, such as the 1987 stock market crash, that a Monte Carlos simulation may not account for.

Conclusion
Numerous free retirement calculators are offered online. These calculators offer a quick way of determining the effectiveness of specific retirement strategies. Advanced retirement calculators, that include the impact of varying returns provide a more accurate retirement strategy analysis.

Related Sites:
http://www.businessweek.com/2001/01_04/b3716156.htm
http://www.latimes.com/business/investing/la-plan4retire-story15,1,2355170.story

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