Take Retirement Calculators With a Grain of Salt

Calculators can be wonderful resources in the retirement planning process. The problem with these tools however, is that like any machine or computer, they are only as effective as the person using them. And as helpful as these devices can be in some ways, they can sometimes provide a distorted perception of reality, breeding a sense of misplaced security that their findings will come to fruition, when in fact any number of variables and events could drastically alter one's retirement financial outcome.

Lack of Knowledge

As I mentioned, a calculator is only as effective as the person using it and the particular information that person feeds into it. This can be the downfall of many calculators since a lot of people just aren't knowledgeable enough about their personal finances to make basic judgments about the input they are entering.

Many retirement calculations are based upon expected rates of return, number of years until retirement, investment contributions, inflation, income growth potential, and social security or pension payments. In essence, and for many people, these factors involve a lot of guesswork. With the state of the nation, the social security system, state-funded pension plans, consumer product prices, home prices, inflation, foreign turmoil, and plenty of other economic aspects destabilizing our collective financial futures, we are left to make our best guesses when entering such input, leaving a large potential for error looming.

Rates of Return

Many retirement calculators and calculations that I have seen often use a value of 8% investment returns in their equations. Not to be a downer or anything, but I don't think the majority of the population has seen 8% growth in their retirement account over the last decade. I know I sure as heck haven't. I'm just starting to creep past the point I was at before the start of the financial crisis and subsequent recession.

The problem I have with using this amount is that I think it provides a warped perception of what investment returns should be and are when it comes to retirement planning. While I would love to get an annual 8% on my investments, I don't think this should be considered the norm -- especially these days when bubbles seem to burst quite regularly. I tend to believe that sticking with a conservative 4-5% range can provide a more realistic calculation and errs more toward the side of caution.

Factors Often Not Considered

I fully realize that a calculator designed for the masses can't be expected to take into consideration every possibility and eventuality for each person using it. However, there are often things that are left out of retirement calculations that can significantly affect how your money grows or is utilized once into retirement. Things like broker commissions, fees, taxes, spending habits, health related issues or pre-existing health conditions, and special personal considerations can be left out of such calculations and could have significant ramifications upon one's retirement finances.

Misconceptions

A calculator is not a crystal ball, and even the most advanced calculator that takes as many retirement variables into consideration as possible, can't predict the future. That's one of my biggest problems with calculators. Just because they give you an answer, it doesn't mean that answer is what will occur.

It always aggravates me when I hear financial advisors or personalities on television telling guest callers how much they'll have in their retirement accounts in five, ten, twenty years or more. How do they know? They're just making a calculated guess based upon certain information.

What if the stock market plunges again like it did with the tech market bubble or the financial crisis? What if you suffer a debilitating illness and lose your job or rack up huge health related expenses? What if a natural or manmade disaster makes the geographic location in which you reside unlivable and you must abandon your home and your job? These are the types of things that a calculator can't predict and that can skew their accuracy.

And by pointing out such faults with retirement calculators, I'm not trying to say that they are bad things; quite the opposite in fact. In many instances retirement calculators provide people with much needed information that can help them plan for the future. However, I feel that a calculator's results should be viewed with skepticism, and at times maybe even a little pessimism, and that they be used to make well-informed financial decisions regarding a retirement rather than as the basis for an exact picture of one's retirement future.

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Disclaimer:

The author is not a licensed financial or retirement professional. The information provided in this article is for informational purposes only and does not constitute legal or financial advice. For financial advice, readers should consult a licensed financial advisor. Any action taken by the reader due to the information provided in this article is at the reader's discretion.