6 Reasons to Beware the Simple Retirement Calculator

simple retirement calculator

In this day in age, it seems just about anything can easily be done online. You can file your taxes, compare rates for a new auto loan—you can even order groceries to be hand picked and delivered to your door.

You can also do some of your retirement planning online.

There are many new and sophisticated retirement planning tools. However, there are also some overly simplified retirement calculators and there are serious reasons to be cautions when choosing which kind of retirement calculator to use.

While we all like taking fun online quizzes, a retirement calculator should be much more complex than a test to see which celebrity would play you in a movie about your life.

Here are six reasons you might want to steer clear of the simple retirement calculators and understand the pros and cons of retirement calculators generally:

1. A Simple Retirement Calculator Can Give You Misleading Results

Most retirement calculators give projections based on a series of inputs to show whether a household will be able to meet their financial needs in retirement. Your inputs are usually combined with a long list assumptions and then the tool tells you if you are “prepared” for retirement, or how much you need to save.

However, many calculators base their calculations off of only a few simple inputs.  One of the most widely used retirement calculators, CNN Money’s “Will You Have Enough to Retire” only asks users 5 questions and then the rest of the information is based on assumptions — assumptions that may or may not be relevant to you and your future.  There is no way that these results are going to be reliable for most people.

However, a February 2016 study at Texas Tech University finds that one of the problems with publicly available planning tools is that those who use them rely too heavily on the answers they present.  “Publicly-available retirement planning tools are publicized to aid households in their retirement planning efforts, but households are likely overestimating tool effectiveness,” the study authors write. “The authors conclude that the advice provided from a majority of these tools is extremely misleading to households, and propose a more systematic approach to tool development by improved choice of input variables.”

Tip for Finding a Retirement Calculator that is Not Misleading:  You will want to look for a retirement calculator that asks sophisticated and detailed questions about your finances now and into the future.  For example, the NewRetirement Retirement Calculator enables you to put different levels of income, expenses and savings rate.  Afterall, it is highly likely that these levels will evolve dramatically over the rest of your life. You can also set investment return rates, inflation rates and much more.  This kind of detail can give you better projections for how well you will fare in retirement.

2. A Simple Retirement Calculator Can Not Predict Unexpected Events

A retirement calculator can present a decent guess as to whether you’ll be prepared for retirement based on assumed—and somewhat steady—factors.

What it can’t predict: market crashes, economic recessions, health care crises and other unexpected events. A major hospitalization, for example, could change your retirement picture drastically by requiring you to use your retirement savings in order to pay for substantial health care expenses. Likewise, a global recession like the one seen in the years following the housing crash in 2007 caused many households to lose a substantial amount of their home equity and investments. Retirement calculators fall short in that they can’t predict the future and don’t have any way of accounting for these (unlikely) possibilities.

Tips for Preparing for Unexpected Events in Retirement: No one — not even the best financial advisors — can predict the future.  However, some of the more sophisticated retirement calculators do try to deal with uncertainty.  For example, the NewRetirement Retirement Calculator runs different scenarios and shows you optimistic and pessimistic projections which can help you think about and plan for the unexpected.

3. Simple Retirement Calculators Make Assumptions that Do Not Apply to You

Online tools do a good job of making broad estimates based on a few factors such as current age, income and expenses. But these simple retirement calculators are limited. They usually do not ask for specifics nor are they personalized.

The devil is always in the details and the more detailed the retirement calculator is, the better your results will be.

For example, when they ask for retirement date, does that mean when you start Social Security, stop working at your current job or when you stop working entirely?  When you put in expenses, is that your expenses now? At the beginning or retirement? At the end of retirement?  It is a good bet that your expenses will change — nevermind your income.  And these tools make big assumptions about how long you are going to live.

The researchers at Texas Tech suggest that all inputs need to be as detailed as possible, but longevity can be a particularly difficult one to average.  How long you are going to live can be a huge factor in determining if you have saved enough or not.  You might be able to maintain your desired lifestyle till age 75.  But what happens if you are likely to live till 85? What about 95? Or 105?!?!!  That is a huge swing!

Most calculators use averages for life expectancy, but these averages do not account for good genetics or whether or not you are a smoker.  “Studies indicate that smoking significantly affects life expectancy,” the Texas Tech researchers write. “Several studies estimate that individuals who smoke throughout adulthood will shorten their life expectancy by 6.5 to 15 years…suggesting smoking is an important factor in determining longevity.”

Tips for Dealing with Assumptions and Averages:  At the very least, you will want to use a retirement calculator that clearly outlines the assumptions they are using — and make sure you understand them.  At best, you find a retirement calculator like the NewRetirement Retirement Calculator that lets you set your own values for many of the assumptions.  Whether you want to plan to have enough money until you are 75 or 105, this tool let’s you set your own life expectancy so you can more accurately plan for a secure retirement.

4. Simple Retirement Calculators Ignore Your Biggest Sources of Wealth

Most retirement calculators are hosted by financial services companies.  They are therefore mostly focused on your savings and investments.

However, for most people, their homes are their biggest assets — much more valuable than their savings.  And, there are a variety of ways that seniors can tap into their home equity.  Downsizing, renting out rooms, refinancing or getting a reverse mortgage are all popular ways to use money you have saved up in your home.

It can be a mistake to plan for your retirement without really looking at your home equity.  Adjusting your budget, assessing when to start Social Security, a retirement job and other factors can each have a bigger impact on your wealth than savings and investments.

Tips for Planning with Home Equity and Other Factors Beyond Savings:  You will want to find a holistic retirement calculator — one that looks at all aspects of your retirement finances, not just savings and investments.  In particular, you will probably want a retirement calculator that enables you to assess whether or not you want to tap into your home equity.  The NewRetirement Retirement Calculator lets you run different scenarios to see what happens to your retirement budget, savings and estate when you tap into home equity using different methods.

5. Simple Retirement Calculators Don’t Enable You to Maintain and Update Your Plan

Simple retirement calculators are meant to just give you a quick idea of how you are doing.  They only take about five or 10 minutes and they do not save your information or enable you to maintain or update it over time.

However, the choice of when to retire is one of the biggest financial decisions you will ever make.  It is a big deal and something that merits a bit of time and effort.

Furthermore, retirement planning should really be an ongoing process.  Ideally you start with a detailed and sophisticated tool and then you keep updating your information and making adjustments every month or so.

Imagine that inflation kicks in or that you suddenly got an unexpected inheritance or your health situation changed.  Wouldn’t it be nice if you could immediately add the new information to your retirement plan and instantly assess your financial security moving forward?

Tips for Finding a Retirement Calculator that Enables You to Maintain Your Plan: Ideally you use a retirement calculator that allows you to save your information and make updates — which usually means creating an account.  Be sure to understand how a company operates before creating an account.  You will want to be careful to understand how the company uses your data. NewRetirement does not sell your information and they do not call or email you unless you have requested something specific. And making an update in the NewRetirement Retirement Calculator can be fun and interesting. When you make a change, you get instant feedback on how the change impacts your retirement plan.

The Best Retirement Calculator Helps You Get Your Retirement Planning Right!

A simple retirement calculator can be fun, but for the reasons stated above, you should be cautious.  Retirement planning is really something you need to get right.  You don’t get a second chance and you don’t want to run out of money at age 72 if you plan on living till 92.

The best retirement calculators are sophisticated, but easy to use.  The NewRetirement retirement calculator was recently voted the “Best of the Web for Retirement Planning” by the American Association of Individual Investor’s (AAII).  Get started and assess and improve your retirement plan right now.

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