Warning: Select Your Retirement Calculators Wisely

Imagine doing retirement planning on two different sites. According to one site you are right on track, but the other says you will have a retirement shortfall of over $500,000. Alarming?

You should be aware that all retirement calculators do not produce the same results.

What do you do? Don’t trust every financial planning tool you find on the Internet. Instead, evaluate each calculator with the following in mind:

1.  Retirement planning is complex — The logic, details, assumptions and programming behind a retirement calculation are extremely complex. Creating a calculator to project the growth of your various holdings, including future savings and investments during the “accumulation” stage of your life, is a challenge. Then, you need to decide in which order to liquidate assets, since the calculator continues to compound remaining assets over your life expectancy. To understand all the financial and programming issues involved takes professional experience and technical knowledge. Oversights and/or omissions can have a significant impact on calculation results.

2.  Financial and programming assumptions — Many calculators’ assumptions are unexplained or unidentified to users. Underlying rules are programmed into the calculator, but the vast majority of calculators do not explain them. Unexplained (or omitted) assumptions about inflation, rates of return before and after retirement, life expectancy, state of residency and tax rates, Social Security benefits, and order of liquidation of assets after retirement all can have a material impact on retirement results. Consider this: the difference of a 6% versus 12% return on a single $10,000 investment over 30 years is the difference between $60,225 and $359,496 – almost a quarter million dollars!

3. Relevant data fields— The number of relevant data input items varies widely among calculators. Some calculators ask for less than 15. Yet, predicting post-retirement financial needs is complex; the actual number of variables affecting the adequacy of retirement income is surprisingly large, including obviously relevant but seldom identified considerations, such as: the start and stop dates of pension plans; gradual reduction in employment until full retirement; one partner stopping full-time work before the other; special expenditures after retirement, such as weddings or anniversary trips; multiple sources of retirement income; change in state (or even country) of residence. Calculators with too few data input fields limit information needed to get meaningful results for a particular user’s situation.

Answers Written in Sand

Even if you find a financial calculator that seems to take all relevant factors into account, you should view the answers as merely “today’s best guess,” written in sand. Remember, you are trying to predict your financial situation 20 or maybe even 60 years from now. Who among us is wise enough to predict next year’s inflation rate, interest rate, tax changes, stock market outcomes, and personal salary increase? Trying to look 20 to 60 years into the future is, in effect, simply guessing.

For this reason, an annual review of retirement planning calculations is very important. Your goals may change. Your financial information will most likely change, as will the assumptions affecting it. Retirement planning is filled with changing tax rules, investment options, and hidden traps for the uninformed. Although the quality of advice and calculators available on the Web are improving daily, this aspect of personal financial planning will surely benefit from the advice of a qualified financial advisor.

More to come!

We have recently begun a comprehensive technical review of Web-based retirement planning calculators. Visit us soon to see the results.

We also invite you to e-mail us at research@noverus.com and tell us which retirement planning calculator you like the best and why.