Why I Don’t Like Online Retirement Calculators | Smart Change: Personal Finance


(Maurie Backman)

In the course of saving and planning for retirement, you may be tempted to use different tools to see if you’re on track. In fact, all you really need to do is search for the words “online retirement calculator,” and you’ll get a host of free options for determining how on track — or not — you are.

At first glance, those online retirement calculators might seem pretty useful. But here’s why I’m really not a fan.

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1. They make assumptions about your investment mix

Almost every online retirement calculator I’ve used to date has asked what my retirement plan balance looks like, and how much I routinely contribute to my account each month. But many calculators don’t inquire about my investment mix. And those that do ask me how I’m invested tend to narrow those choices down to conservative, moderate, and aggressive, when in reality, there are many in-betweens.

If you have an IRA or 401(k) plan that’s invested heavily in stocks, it may generate a lot more growth than a retirement plan that’s loaded with bonds. Any online retirement calculator that doesn’t at least make that basic distinction isn’t worth using.

2. They make assumptions about your spending

Online retirement calculators typically ask you what your annual income looks like. Based on that and your savings rate, they can make predictions about your future income and tell you whether it’ll suffice or not. But I have a big problem with that — namely because the amount of money you earn each year isn’t necessarily the amount you spend.

Let’s say you earn $300,000 a year but manage to live comfortably on half that amount. In retirement, you might manage to maintain a nice lifestyle on one-third that amount. But because online retirement calculators commonly don’t take actual spending into account, they can mislead you into thinking you won’t have enough income down the line.

3. They often fail to factor in outside income sources

Many of the online retirement calculators I’ve played around with have asked how much money I have socked away in my retirement account, and some have asked me to estimate my Social Security benefit or have done that for me. But most of those calculators don’t ask about income beyond that point.

A lot of seniors make the choice to work part-time in retirement, and if you go that route, it could give your income a serious boost. Similarly, you may decide to start a small business in retirement, or you may own a second home that generates rental income for you when you’re not using it. Though some online retirement calculators take these factors into account, many do not, which means the information they spit out isn’t accurate.

Use online retirement calculators carefully

While online retirement calculators can be a helpful starting point when it comes to planning for your senior years, a better bet may be to sit down with a financial advisor and have that person run different scenarios based on your specific circumstances, including your spending habits, retirement goals, and unique investment mix. Taking that approach could spare you a world of stress, all the while giving you a more accurate picture of where you actually stand.

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