Why You Need to Be Cautious with Online Retirement Calculators
If you were dealing with a major health trauma, would you turn to a website for a diagnosis? In our “Web-MD” society many people do just that for minor ailments or research, but it seems ridiculous to trust the internet for something that could be life threatening. I imagine, in such a case as heart disease, cancer, or any debilitating illness, you would prefer to visit a qualified and trusted medical professional who will avoid generalizations and “rules of thumb”, exploring all the potential possibilities of your symptoms, applying your personal medical history to propose the best course of action for your specific circumstances.
It is not much different with retirement planning. Too often, people place their trust in retirement calculators and can make common mistakes that may be catastrophic to their retirement.
I am not completely opposed to using retirement calculators, as they can be useful tools for planning in general; however, it is important to understand the limitations of these calculators and the impact that can have on your future.
As Certified Financial Planners ™, we have met with several individuals who came to us for help and were convinced that they were ready to retire because an online retirement calculator told them so. Often, the calculator was right. Generally, this happens when the situation is fairly straightforward. In other words, there is significant income and investments to easily sustain spending. There have also been times when our analysis suggested that the individual was not ready to retire and that to do so would require significant changes in lifestyle…or worse, they would run out of money at some point in the future!
The Downside to Retirement Calculators:
- The Output Is Only As Good As The Input: You are making a lot of assumptions when using most retirement calculators. Some of them require a certain level of experience, expertise and research. If just one of your inputs is wrong, it can throw off the long-term results significantly.
- Inflation – Even expert economists have difficulty predicting inflation accurately
- Life Expectancy – You can look at family history and your health, but unless you have your crystal ball, this one’s basically a guess. Due to recent advances in medical technology and more pervasive knowledge of the role of diet and exercise in longevity, studies have shown that most people today underestimate their life expectancy.
- Investment Return – Historical returns and a diversified portfolio can help you predict an average return over the long term, but there are no guarantees! (And if there are, then inflation and/or expenses is almost certainly a problem)
- Expenses in Retirement – There are many “rules of thumb” for determining your expenses, and if you use one, your actual figures will probably be different. A comprehensive analysis of your expected expenses should be done to get this number as accurate as possible. A small difference in your actual expenses can mean a big difference in your retirement success.
- Inflexibility: Many financial calculators prepopulate assumptions. Retirement is a very personal experience and should be customized to your needs, risk tolerance and goals. If the calculator is too general, it is highly unlikely that the results will apply to your specific needs.
Retirement is one of the few things in life in which you do not get a second chance. There is no practice or dry run, short of returning to work as a Wal-Mart greeter at a much older age. You must make sure your assets cover your needs for the rest of your life from the beginning. The complexity and human elements of your retirement are not something you should trust to a mathematical algorithm. You have worked your whole life for a comfortable retirement… don’t leave it to chance!