You can't trust retirement calculators (but you should still use them)

Despite calculators’ shortcomings, they’re an important part of retirement planning. Here’s why.

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Published June 18, 2021|3 min read

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When I started my first job out of college, I started saving for retirement via a 401(k). My golden years felt very far away, yet I knew I should start saving early. But I had no idea how much to contribute.

Like many, I turned to Google for answers. I searched something along the lines of “How much should I save for retirement?” and was prompted to use a retirement savings calculator. There are plenty of these basic online tools out there, and many of them follow a simple formula. Put in some basic information like expected retirement age and annual salary and the calculator will give you an estimate of how much money you’ll need at retirement age and how long your savings will last. Great, I thought, I never have to think about retirement savings again. 

Unfortunately, it’s impossible to predict the future. It would be nice if there was a magic formula that would determine exactly how much we need to save for retirement, but there isn’t. There may be unexpected expenses along the way, or we may spend more in retirement than we realize, said David Schaeffer, CEO of American Retirement Advisors. Despite calculators’ shortcomings, they’re an important part of retirement planning. Here’s why.

How retirement calculators get it wrong

The big reason you can’t rely on retirement calculators to predict how much you should save is that they assume details about your future financial picture and the economy. Austin Rouk, certified financial planner at Beacon Pointe Advisors, explains some of the key factors calculators miss: 

  1. Basic financial facts: Calculators will ask for basic financial facts like your current salary and annual savings rate. But they often don’t account for factors like salary increases (or if they do, they assume a flat rate) or risk tolerance. For example, most calculators assume an ongoing 8% compounding return. A more conservative investor may expect lower rates of return, while a more aggressive investor may seek higher rates of return. 

  2. Economic information: Most calculators will use a flat percentage for factors like overall rate of return and inflation but these indicators will almost certainly fluctuate over the course of your working life. For example, there have been three recessions since 2000. While these swings are normal, how severely they impact your retirement savings depends on how far off you are from retirement age, and most calculators can’t capture these fluctuations. 

  3. Lifestyle decisions and changes: Who knows how long you’ll live, or when you’ll stop working, or how much you’ll spend in your golden years? Calculators make predictions about all of this information but even the smallest deviation (like retiring a year early) can throw off your savings plan.

“The problem really arises when people use the wrong assumptions. They may use an estimated return on their investments that is too high, live longer than expected or underestimate their retirement spending,” said Rouk. “Entering one assumption in wrong can have a potentially detrimental impact on a person's financial future.” 

But here’s why you should still use a retirement calculator  

Retirement calculators are excellent at one thing: Getting you to start thinking about retirement. They can be a great initial tool to understand your financial future and help you get organized. When I first used one, it made me feel more empowered to create a savings plan — I still refer to them every now and then to take stock of what I currently have and if I should make any changes. 

“Retirement calculators are valuable tools when used properly,” said Rouk. “You just need to be sure that you are using accurate and realistic assumptions if you are doing it on your own."

If you want to use a calculator to understand your retirement savings goal, try experimenting. Create different savings scenarios by changing your information: For example, try an earlier retirement age, or less income or a longer lifespan. Playing around with different numbers can give you a better idea of a savings goal range to aim for instead of one single number. I personally like this calculator, which allows you to change factors beyond the basics, including expected retirement income and expected income increases. 

Using a calculator, like planning for retirement, isn’t one and done. Your needs and goals will change over time, which means it’s important to revisit your plan at least once a year, or whenever a major change happens. 

If you aren’t sure what assumptions to make, reach out to a financial adviser. They can help understand your specific financial situation and create personalized goals, said Rouk. Here are four ways to get the most out of your planner.