3 Problems I Have With Retirement Calculators

You’ll often hear that it’s important to build yourself a solid nest egg for retirement. And if you’ve been steadily pumping money into an IRA or 401(k) plan for that purpose, you may reach the point where you’re wondering: “Am I on track?”

The good news is that there are numerous online tools that can tell you that. Just do a search for “retirement calculator,” and you’ll get different options for plugging in numbers to see how your IRA or 401(k) plan balance stacks up.

But while those tools may seem helpful at first, they tend to have their share of shortcomings. Here are a few reasons I don’t like them at all.

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1. They make assumptions about your spending habits

You’ll often hear that you can expect to need about 70% to 80% of your former income to get by in a comfortable manner during retirement. But if you don’t spend your entire income, that’s a different story. In fact, a better rule of thumb is to assume you’ll need 70% to 80% of what you spend during your working years, not earn.

Say you earn $200,000 a year but manage to live just fine on half of that. Most retirement calculators won’t account for that. Instead, they’ll assume you need somewhere in the ballpark of $140,000 to $160,000 a year during retirement when a much lower yearly income may be fine for you. So, based on that, you might put in some numbers using a retirement calculator and get a message along the lines of “Danger, you’re not going to have enough money later in life” that may be far from true.

2. They don’t always account for added sources of retirement income

The withdrawals you take from your IRA or 401(k) during retirement may end up being your primary income source. But that doesn’t mean they’ll be your only income source.

Maybe you have a family business you’ll inherit or receive payouts from. Maybe you own an income property that can serve as an ongoing cash source during your senior years. Or maybe you’ll be entitled to a larger Social Security benefit than expected.

And speaking of Social Security, while some retirement calculators will factor future benefits into your income, those estimates are usually just guesses. As such, you don’t get a very clear picture of how much annual income you can look forward to.

3. Using them can be very demoralizing

Many people who save well for retirement input their numbers into online calculators only to be told they’re way off base and have a ton of catching up to do when that’s not really the case. But that can be a really upsetting, demoralizing thing. And frankly, if you’re doing a bang-up job of setting funds aside in your IRA or 401(k) plan, you don’t need that added stress.

There’s also the flipside. Some of these tools might tell you that you’re doing fine on the savings front when you do, in fact, have to catch up. That’s a dangerous thing.

Don’t put too much stock in retirement calculators

While retirement calculators are designed to be helpful, the unfortunate reality is that many just aren’t. Now to be fair, some of these tools are better than others, so it does pay to do some digging and try a few out. This tool, for example, lets you input extra data like your life expectancy and various retirement income sources, so you might get a more accurate estimate of how well you’re doing.

All told, don’t panic if you use a retirement calculator and get a warning that you’re way behind on the savings front. If you’re consistently setting aside a nice amount of money for the future, rely on that more so than what a calculator tells you.

But also sit down with a financial planner or advisor and get a professional’s opinion based on your specific goals and circumstances. Doing so might bring you the comfort you need if you’re worried your nest egg won’t cut it.

And if it turns out you are behind on savings, that person can give you concrete advice on how to ramp up. An online calculator, on the other hand, might spit back something like “You’ll need an extra $1.2 million if you want to enjoy your retirement,” and that’s apt to be far from helpful.

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