Retirement Calculators, From Rags to Riches with a Single Click

Dana Anspach

December 3, 2016

How would you like to go from running out of money in retirement, to instantly having a surplus that allows you to travel and leave money to heirs? I can show you how… Use an online retirement calculator. Or use a spreadsheet projection with an unrealistic set of assumptions. Or use a financial planner that doesn’t understand how drawing money out impacts the internal rate of return you’ll earn on investments.

With one erroneous assumption, you go from the poorhouse to the penthouse. That should scare you. It scares me. And because I am in the business of making retirement calculations for a living, it is one of those things that keeps me up at night. I spend a lot of time thinking about how to make sure our projections are realistic. What if we get it wrong… what if we said you could afford it, and you can’t? I don’t want to be in that position.

It’s All in the Assumptions

Online retirement calculators, however, are in exactly that position. You choose a set of assumptions. (And you’ve heard what happens when you assume, right? You know, you make an “ass” out of “u” and “me.”).

You decide on assumptions about many things like inflation, the rate of return you will earn, and your estimated tax rate. Depending on what you choose, you’ll get vastly different answers as to how well prepared you are for retirement.

And what if you use the same set of assumptions, and try plugging them into several retirement calculators? We tried that and came up with a retirement calculator scorecard to rank the online calculators that we tested.

For each of nine online retirement calculators that we reviewed, we attempted to use the same set of general assumptions below. We’ll call our fictitious person Mr. and Mrs. Hoping to Retire.

Assumptions for Mr. and Mrs. Hoping to Retire

  • Ages: Husband – 59, Wife – 57
  • Retirement target age: 65/63
  • Each earns $60,000 annually
  • Estimated annual expenses: $70,000
  • Social Security to begin at age 67
  • Current Retirement Savings: $750,000
  • Rate of Return on Assets: 5%
  • Inflation: 2%
  • Home: $500,000 Value, Mortgage $250,000

The first problem we encountered is that not all retirement calculators offer the same input options or the ability to change the assumptions. Some have default assumptions that can’t changed; others allow you to make unrealistic assumptions, such as the near impossibility of achieving a 20% annual rate of return.

Even with our attempt to use a consistent set of assumptions one calculator said the Hoping to Retire family would have $6,242 a month in retirement while another said they’d have $9,703. One said they would have total savings at age 65 of $1,126,800 which would be $84,000 more than the minimum they would need. Another calculator said this person would need $1,461,648, and thus would need to save hundreds of thousands more, or risk running out of money by age 81.

If you were Mr. and Mrs. Hoping to Retire, which scenario would you believe? Suppose you thought the surplus situation seemed right, and you retired and spent $9,703 a month. If you were wrong, you could run out of money quickly. On the other hand, what if you scrimped and saved and worked for several years past age 65 to make up a shortfall, when in fact, you didn’t need to? That doesn’t sound like a great outcome either.

Use Retirement Calculators with Caution

And therein lies the problem with online retirement calculators, or with any retirement planning software package – how do you determine the right set of inputs, interpret the results, and what are the action steps you should take?

And, as you go along, what are the adjustments to make along the way? A retirement calculator does not frame trade-offs very well. What if spending $10,000 a year less meant you could retire five years earlier? Some would willingly find expenses they could reduce if it got them out of a job they didn’t enjoy. What if working three years longer meant you could travel the world during your first five years of retirement? What if your plan relies on achieving a 7% rate of return in retirement, but based on how you invest, there is less than a 50% chance you’ll achieve that? Do you want a 50% chance that you’ll have to reduce your standard of living in retirement? These are the types of conversations to expect when you go through a professional retirement planning process.

And, by all means, if you like data and numbers, I encourage you to play around with online retirement calculators. They are great at helping you see all the factors that go into projecting a result. But, as far as relying on that result to make definitive decisions? It’s kind of like playing Russian Roulette with your retirement. Use them with caution, and be sure you understand the limitations.