Retirement calculators need your best guess work

Out there, in the vast expanse of the cyber world, there's a good chance some computer software program has pinpointed when you will die.

The thought might send shivers down your spine but life insurance companies employ teams of actuaries, who compile reams of data, that provides clues to your life expectancy. Some of that information comes from you and some allows actuaries to make assumptions about you based on your demographic. Even the Federal government is in the actuarial game trying to plan for benefit expenditures like the Canada Pension Plan and Old Age Security.

Life expectancy is just one piece in a shifting puzzle that helps determine how much you will need to retire. Fortunately, looking into your future is not just for big business and government. Many financial websites provide retirement calculators to do just that. Some are more detailed than others but in all cases it's a best guess — and who is better at guessing about you than you?

But before you sit down to plot out your retirement future, here are some factors you should familiarize yourself with:

Life expectancy

Obviously, how long you live is a big variable when determining how much you need to sock away before your retirement and how long it should last. Thanks to improved living standards and advances in healthcare the average life expectancy has increased. According to Statistics Canada a woman born in 1970 is expected to live to 76 years. Men born in 1970 aren't so lucky — they're expected to live to 69 years.

Girls born in the past five years are expected to live to 83 years while the average boy in the same age group will only make it to 79.

It's a good starting point for guessing your own mortality but factoring in your current health and family history can make it more accurate.

Retirement income

Before using a retirement calculator you also need to ask yourself what type of lifestyle you're hoping for in retirement. Are you the stay-at-home type who likes to garden or do you want to travel the globe?

Any lingering debt would certainly put a damper on your lifestyle, but assuming your debt will be paid off at retirement a rule-of-thumb often used by financial planners to determine determine your cost of living is 60 to 80 per cent of your pre-retirement income.

It's also important to keep in mind living expenses get lower as people age and health declines. A one to two per cent reduction in living costs each year after the first few years of retirement should be a safe calculation.

Income sources

When calculating your retirement income it's important to include all assets and income. The biggest chunk of income normally comes from registered retirement savings plans (RRSPs) and company pension plans. Many people change jobs and pay into company pension plans throughout their careers so it's important to include all pension plans.

With the allowable contribution amount growing to $25,000 next year and $5,000 plus inflation in future years, tax free savings accounts are playing a bigger role in retirement planning. Be sure to include your TFSA.

Also include Canada Pension Plan (CPP) and Old Age Security (OAS) payments. In some cases they can account for up to one quarter of an individual's retirement income.

Some seniors opt to live off of the equity in their homes either through a reverse mortgage or secured line of credit. If that is the case, the appraised value of the home should be included as an asset.

Investment growth and contributions

Estimating how much you will sock away until you retire and how much it will grow involves commitment, investing skills and a lot of luck.

Be realistic when determining how much you will save each year. It's better to lowball in the beginning and be pleasantly surprised in the end.

The same rule applies to determining the return on your investments. In the past, financial advisors factored in eight per cent annual growth from a balanced stock/bond portfolio. In a post financial meltdown world it's becoming clear that record low bond yields and iffy stock markets can not live up to those expectations. More prudent financial advisors suggest five per cent annual growth.

The economy and fate

One variable we can't control is the broader economy but a good retirement plan could smooth out its impact. Strong growth could boost stock and bond returns and weak growth could keep inflation low. Regardless, most retirement calculators suggest including an annual inflation rate of three per cent.

Like the economy, most of our lives are constantly in a state of flux. Unexpected expenditures could set a retirement plan back and windfalls, like receiving an inheritance, could advance a plan. Still, a best guess is better than no guess at all.