If you've ever tried to create a financial plan for retirement, you already know how complex it is to try to account for decades of personal financial variables, taxes, potential pitfalls, life changes, predicting the future, etc. Unless you're a whiz at building financial planning tools, it will likely end up being an exercise in frustration. To figure it all out correctly, most people need a little help in the form of a comprehensive planning tool. If you can find one.
There are hundreds of free retirement calculators available across the internet, mostly found on financial sites. Most will ask you a handful of questions, use some generic assumptions, and produce a lump sum amount that you need to save for retirement. Slightly fancier ones will ask a couple of extra questions, and produce a probability % that represents your chances of having your retirement savings last as long as you need them to. Sound familiar? Imagine, instead of spending hours coming up with a comprehensive, reliable, retirement plan, you can spend 5 minutes (or less) using these free tools, and get your answer. Sounds great, but here's the problem - the information they provide is inaccurate at best. And that's being kind. They are no better than toys, and will mislead you with results that are way too high, or completely insufficient. Here are a few reasons why:
• They don't ask enough information about your financial details to be able to calculate any semblance of a reliable amount. If any tool ever asks you what % of your salary you would like to replace in retirement, RUN! If nothing else, your expenses change over time, particularly in retirement, and you will not need the exact same amount every year for 25+ years. This is lazy math.
• They don't account for life changes - your salary, your spouse retiring many years before/after you, your savings contributions, having kids, selling a house, etc. A worthwhile retirement planner will provide flexibility, and will be able to account for life changes, by year!
• They don't account for taxes (did they ask for your tax filing status?), particularly on retirement savings distributions (which will have a huge affect on your needs/results). If you withdraw $30,000 from taxable retirement savings to pay expenses, you'll likely need an additional amount to pay for taxes on that withdrawal. For most people, taxes will end up being their number one expense in retirement, so they need to be accounted for properly.
• They don't account for taxes on Social Security income either (yes, it can be taxable, and many people will end up paying taxes on at least part of their Social Security income).
I could go on and on, but the bottom line is that free retirement calculators are completely inadequate. You can't afford to act, or rely, on a retirement plan that leads you in the wrong direction (not to mention that a single number answer is not a plan. How does it help you reach that number?). You only get to retire once, and you need to get it right the first time. Spending a relatively small amount of money for a proper financial planning tool is far better than struggling to save far more than you need to, or, worse, finding out too late in the game that you didn't save enough.
Here's an example of what happens with a free calculator vs. a comprehensive retirement planner:
For this example, I chose the Bankrate retirement calculator (www.bankrate.com) (only because they're not affiliated with any particular company, and they are a reputable financial site). I made the following selections:
• Age: 55
• Household income: $130,000
• Retiring at age 62 (it didn't ask about my spouse)
• Annual retirement savings: 12% of income
• Retirement Income Need: 60% of my pre-retirement income
(ridiculous question - if I were sure about this, I wouldn't need the calculator)
• No income increases before retirement (keeping it simple)
• 26 years of retirement (life expectancy of 87)
• 2% inflation
• 5% return on investment before retirement, 3% return during retirement
• I asked it to include Social Security (again, it didn't ask about my spouse, but assumes that only one spouse works. Really?) It estimates my Social Security income to be $35,840 per year (talk about pulling a rabbit out of a hat!). This assumes that my spouse gets 50% of my benefits (because they have never worked!). Rubbish.
The results state that I would have $776,000 at retirement (age 62), and that my savings would run out at age 82. It tells me to save more. How helpful.
I used the same information in The Complete Retirement Planner, trying to keep the data "apples to apples" as much as possible (the planner asks for far more information, including specifics about expenses, the end of a mortgage, spouse retirement age, specific Social Security benefits, tax deductions, one time events, etc.). The results state that I would have the same amount at the beginning of retirement ($776,000), but my savings would run out at age 76 (not age 82). This is largely due to the fact that the Bankrate calculator didn't account for $200,000 in taxes due from age 62 to age 76 (or what would be owed for another 10 years after that). Imagine trying to make up that difference at age 76! Scary.
The moral of the story - there's no comparison between free retirement calculators and well built financial planning tools that you pay for. You need the right tool for the job, and planning for retirement is not the time to try to get by with inferior equipment - the consequences are far too serious. No retirement planner is perfect, or can accurately predict the future, but almost all that I've seen are better than any free one. The Complete Retirement Planner is far more thorough than others and costs $69.99, making it an absolute bargain. There are a few others, with varying complexity, that cost anywhere from $100 - $300. No matter which one you choose, the money will be well spent, giving you far more accurate results than any free calculator could hope to.