3 Problems I Have With Retirement Calculators

(Maurie Backman)

You’ll often hear that it’s important to build a solid nest egg for retirement. And if you’ve been consistently pumping money into an IRA or 401(k) plan to do this, you might get to the point where you’re wondering, “Am I on the right track?”

The good news is that there are numerous online tools that can tell you that. Just search “retirement calculator” and you’ll be given several options to insert numbers to see how your IRA or 401(k) plan balance is trending.

But while these tools may seem helpful at first glance, they usually have some shortcomings. Here are a few reasons why I don’t like them at all.

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1. You make assumptions about your spending habits

You’ll often hear that you’ll need about 70% to 80% of your previous earnings to comfortably make ends meet in retirement. But if you’re not spending all of your income, that’s a different story. In fact, a better rule of thumb is to assume that you need 70% to 80% of what you need spend not earn during your working years.

Let’s say you make $200,000 a year but manage to make a good living on half of it. Most pension calculators do not take this into account. Instead, they assume you’ll need somewhere between $140,000 and $160,000 a year in retirement, when a much lower annual income might be okay with you. So, based on that, you could plug some numbers into a retirement calculator and get a message along the lines of “Danger, you won’t have enough money later in life,” which can’t be nearly true.

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2. They don’t always consider additional sources of income for retirement

The withdrawals you make from your IRA or 401(k) during retirement may end up being your primary source of income. But that doesn’t mean they will be your only source of income.

Perhaps you have a family business that you inherit or receive payments from. Perhaps you own an investment property that can serve as an ongoing source of cash during your senior years. Or maybe you’re entitled to a higher Social Security benefit than you expected.

Speaking of Social Security, while some pension calculators factor future benefits into your income, these estimates are usually just guesswork. As such, you don’t get a very clear picture of how much annual income you can look forward to.

3. Using them can be very demoralizing

Many people who are saving well for retirement enter their numbers into online calculators, only to find that they are way off the mark and have a lot of catching up to do when they aren’t really. But that can be a really annoying, demoralizing thing. And frankly, if you’re doing a great job of putting money aside in your IRA or 401(k) plan, you don’t need that extra stress.

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There’s also the downside. Some of these tools can tell you that you’re doing well on the savings front if you do, in fact have to catch up. This is a dangerous thing.

Don’t put too much stock in retirement calculators

While retirement calculators are supposed to be helpful, the unfortunate reality is that many simply aren’t. Well, to be fair, some of these tools are better than others, so it’s worth digging in and trying a few out. For example, this tool allows you to enter additional data such as your life expectancy and various sources of income for retirement, which may give you a more accurate estimate of how well you are doing.

All in all, if you use a retirement calculator and get a warning that you’re way behind on the savings front, don’t panic. If you’re consistently putting a nice amount of money aside for the future, you’re going to rely on it more than what a calculator tells you.

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But also sit down with a financial planner or advisor and get a professional’s opinion based on your specific goals and circumstances. This may bring you the comfort you need when you’re worried your nest egg isn’t making it.

And if it turns out that you’re behind on savings, that person can give you specific advice on how to increase your cash. An online calculator, on the other hand, might spit out something like, “You need an extra $1.2 million if you’re going to enjoy your retirement,” and that’s far from helpful.

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