If you visit any financial service company’s site or if you type ‘retirement calculator’ in to your Google search box you will find a number of free retirement calculators which you can utilize at any given moment. Most of these calculators have seven to eight fields that require input from the user which after entered will provide a computation of projected income stream. While it is prudent to plan for the future, some of the results that these calculators provide to the individuals using them can be misleading and may result in missing the mark when it comes to one’s retirement goals. Online calculators provided by big-name financial service companies may be giving misleading advice.
A recent study by Corporate Insight found discrepancies with the income projections provided by 12 different free retirement planning calculators. The exact same profile was used when filling the input fields but the results were quite different with a 60% variance in the monthly income projections and an 85% variance in the suggested goal outcome (a monthly income goal based on a particular income replacement ratio). These findings were almost identical to the ones that researchers from Texas Tech and Utah Valley University found earlier this year. This study is not a rogue finding. Rather, it backs up the case that these free, overly-simplistic calculators, though helpful to get a broad understanding of how important it is to save and invest over time, provide unreliable figures and projections for the individual who is actually trying to plan for his or her retirement.
The reason that these calculators miss the intended target for so many investors is because the answers or projections that are provided are tied directly to assumptions and biases of the people who wrote the program. One of the 12 providers may use an estimated return on your assets of 5% whereas another one may use 4%. One of the free retirement calculators may use an inflation rate of 3% while another may be using 2%. These are a couple of examples of how these programs use different metrics but it showcases the potential for vast differences in the output of these calculators based upon the same inputs. These free calculators don’t know you or I or any tendencies that one may have or personal goals that might not get listed in one of the fields. Time and time again the old adage “you get what you pay for” is proved to be still true.
When one begins to develop a retirement plan it is very important to take into consideration one’s own risk tolerance, past investment behavior, spending habits, and personal nuances that most of these programs do not consider when giving you their simplistic projections. If a financial plan is developed and uses a detailed retirement cash projection and tests the outcomes using probability techniques, make sure to review the assumptions that are used by the planner or software. Having a wrong assumption at the beginning of a journey will inevitably lead you to the wrong destination. It is unequivocally important to plan for one’s retirement, but one should do so utilizing a plan developed for the individual that they are.
“There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and people who consider price only are this man’s lawful prey” - John Ruskin