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Retirement Calculators

Retirement calculators can be very useful, if used properly.

The accuracy of results is also extremely important, because either you, or a financial planner, will use the results from a retirement calculator to make one of the most crucial decisions of your life: Are you financially able to retire?
If  you get this decision wrong, you could run out of money for healthcare or other essentials in your old age.  Alternatively, you could waste years of your life doing unnecessary or unenjoyable work.

Please be aware that some calculators make assumptions that may not suit your situation. For example, many calculators continue to have problems with early retirement or near-retirement scenarios.

Different calculators can produce very different results.  There are simply too many variables involved and too many judgment calls on the part of programmers. Any retirement calculator, in any given scenario, can be caught making some simplifying assumption about reality.

Beware of retirement calculators that compute your retirement expenses as some percent of your salary, or assume that Social Security must start at your “retirement” date.  Some free retirement calculators have  built-in or undocumented assumptions for stock market returns, inflation, or tax rates. Some calculators use overly optimistic market returns.  Some use your marginal tax rate as an effective rate, overstating your tax liabilities.

If you are confident in your understanding of key financial concepts, an online retirement calculator may help you get a general idea as to whether you are on track.  However, these calculators are not nearly as robust as the professional software that a financial planner uses. 

Here are the things that I would consider most important when selecting an online retirement calculator:

Number of Input Variables
  • The simplest calculators will feature just a dozen input fields or less, and usually perform only a simple fixed rate/average return calculation. They feature ease of use, and generally will require less than 5 minutes of your time to produce answers.
  • More complex calculators add additional fields, usually handling multiple accounts with different asset allocations, and arbitrary financial “events” such as irregular future income or expenses. Generally they might require 10-20 minutes of your time to produce answers.
  • The most complex calculators will add even more input fields, the ability to compare scenarios, and often Social Security and tax calculations. Generally they will require at least 30-60 minutes of your time to produce answers. And they could easily require several hours to understand all the options, and collect and input all the data to take full advantage of their capabilities. But these calculators have the potential to be most accurate, assuming you take the time to enter good data, and assuming your assumptions about the future hold true.
The approach to modeling stock market returns over time:
  • Using an average return for each year is the simplest approach. However, unless you reduce that average return by some arbitrary amount, it does not take into account the impact of volatility on your portfolio, and will be overly optimistic.
  • A Monte Carlo analysis, using an average return plus a standard deviation, takes volatility into account, but requires expertise (or trust) for choosing the necessary mathematical parameters. And there are arguments that the artificial randomness introduced by a Monte Carlo simulation doesn’t mimic the real world accurately.
  • Finally, a historical analysis uses actual market data on the performance of asset classes over the past century to model what would have happened to your portfolio over periods in the past. The issue with this approach is whether the future will be like the past or, even if it is, whether the current starting point of high market valuations leads predominantly into the realm of lower return possibilities.
There are arguments, and recognized experts, for and against each way of modeling returns. I recommend that you use calculators that offer all three mechanisms, then compare the results, and draw my own conclusions.

Rather than expecting perfection out of any single retirement calculator. I suggest getting a “second opinion.” You can simply check your situation by running more than one calculator.

And for a professional "second opinion", I recommend that you engage the services of a fee-only CFP®.

Contact me to learn more about how I can help you create your Retirement Paycheck a practical way to think about how you will pay yourself during your retirement years.