I tried another free retirement calculator on a major financial site that was designed to tell you if you were saving enough for retirement. I won't bother naming the source, because the truth is that it had the same flaws that every other calculator like it has. This falls under the heading of FREE RETIREMENT CALCULATORS ARE WORTHLESS! (my favorite subject). That's not to say that every retirement planning tool that you pay for is picture perfect either (although more effort is probably put into getting it right), but why do financial sites continue to publish these calculators that have fatal flaws at their core?
This calculator asked 4 questions (yeah, that should be enough): your age, how much you already had saved, your salary, and what % of your salary you save each year. To play along, I entered the following round numbers:
• Age 45
• $250,000 saved
• $100,000 salary
• 10% saved each year to a 401K
This is the "Aha!" moment - In the fine print, it states that it is assuming that you will need to replace 85% of your salary (that's gross salary) in retirement. That means that I would need $85,000 a year to live on. If I already knew that, I wouldn't need the calculator!
Other issues (just a few):
• Expenses don't change once you retire - and all through retirement for that matter?
• What are my expenses now?
• How much is being withheld from my salary for pre-tax items, like health care, dependent care, commuter costs, life insurance, etc.? Remember, you are living on your net income, not gross income.
• How much will I owe in taxes each year on savings withdrawals?
• What will my Social Security income be, and how much will I owe in taxes on that income?
In the simplest scenario, if I make $100,000/year, with no pretax items except 10% going to my 401K, and only standard tax deductions, my gross income would be approx. $90,000, and I'll pay approx. $18,000 in Federal taxes (21%). State taxes and employment taxes (FICA) reduce your take home pay even more. That means that I'm living off of approximately $65,000/year (depending on the tax specifics). Why would I need to replace 85% of my gross income, or $85,000 per year? And that isn't even including Social Security income.
As usual, not nearly enough questions asked, too many items never even considered, and a huge generic assumption as the foundation. Please, please do not rely on free retirement calculators!
The ONLY way to properly evaluate whether or not you are saving enough for retirement is to use a comprehensive financial planning tool that considers everything I mentioned above, and then some. I'm not trying to sell you something, I'm trying to keep you from acting, and relying, on false information. When it comes to your retirement, you can't afford that type of mistake. Although The Complete Retirement Planner addresses these issues, I really don't care if you choose to use it, or not. Use any other planner that is thorough enough to reliably answer the questions at hand, but please don't take the easy way out and trust toy calculators.
Free retirement calculators cost too much. Wrong answers are expensive!