Why I don’t like online retirement calculators | personal finance

(Maurie Backman)

In the course of saving and planning for retirement, you may be tempted to use different tools to see if you’re on the right track. In fact, all you need to do is search for the words “online retirement calculator” and you’ll be presented with a host of free options to determine how well you’re on track, or not.

At first glance, those online retirement calculators may seem quite useful. But here’s why I’m really not a fan.

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1. They make assumptions about your investment mix

Almost every online retirement calculator I’ve used to date has asked me what my retirement plan balance is and how much I typically contribute to my account each month. But many calculators don’t ask about my investment mix. and that make ask me how i’m invested tends to narrow those options down to conservative, moderate, and aggressive, when in reality there are plenty of options in between.

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If you have an IRA or 401(k) that’s heavily invested in stocks, it can deliver much more growth than a bond-heavy retirement plan. Any online retirement calculator that doesn’t make at least that basic distinction isn’t worth using.

2. They make assumptions about your spending

Online retirement calculators usually ask you what your annual income is. Based on that and your savings rate, they can make predictions about your future income and tell you whether or not it will be enough. But I have a big problem with that, because the amount of money you make each year is not necessarily the amount you spend.

Let’s say you earn $300,000 a year but manage to live comfortably on half that amount. When you retire, you could maintain a good lifestyle on a third of that amount. But because online retirement calculators often don’t take actual expenses into account, they can lead you to think you won’t have enough income in the future.

3. They often don’t take into account outside sources of income

Many of the online retirement calculators I’ve played with have asked me how much money I’ve saved in my retirement account, and some have asked me to calculate my Social Security benefit or have done it for me. But most of those calculators don’t ask about income beyond that point.

Many seniors make the decision to work part-time when they retire, and if you go that route, your income could increase significantly. Similarly, you may decide to start a small business when you retire, or you may own a second home that generates rental income for you when you’re not using it. While some online retirement calculators take these factors into account, many don’t, meaning the information they provide is inaccurate.

Use online retirement calculators carefully

While online retirement calculators can be a helpful starting point when it comes to planning for your senior years, a better option may be to sit down with a financial advisor and have that person run through different scenarios based on your specific circumstances, including your spending habits, retirement goals and a unique combination of investments. Taking that approach could save you a world of stress, while also giving you a more accurate picture of where you really are.

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