Why Retirement Calculators Disagree on How Much You Need to Retire

Those who have tested several calculators find different models tend to come up with different answers

By Robert Stowe England

January 5, 2017

See companion article at this link.

How much money will you need to retire and live comfortably? That’s the question online retirement calculators try to answer. The answer to that question, in turn, affects how much you need to save every year and how you should invest your assets to reach your retirement goals.

Those who have tested several calculators find different models tend to come up with different answers to the same question. Some observers attribute the different outcomes to different model designs and varying assumptions about inflation and investment return, among other factors

Online retirement tools require users to submit data on annual income, annual savings, accumulated assets, and the number of years until retirement. The tools generate an estimated total savings you will need when you retire. Some also calculate how much annual income can be distributed from savings during all your retirement years.

While there have been scores of online retirement calculators created in recent years, online retirement calculators have been around more than two decades. The Employee Benefit Research Institute, Washington, D.C. has since the 1990s offered a free basic Ballpark Estimate calculator to estimate how much you need to save for retirement. EBRI developed the calculator for the American Savings Education Council after the launch of the Choose To Save public education campaign. 

Many online tools are free. Some are quite simple and easy to use. For example, CalcXML of Salt Lake City, Utah, offers a free basic calculator that requires only a dozen inputs to answer the perennial question, “How much will I need to save for retirement?”

Many of the newer design calculators have added additional functions and enhanced capabilities. For example, the Ultimate Financial Calculator by FinancialMentor.com of Reno, Nevada, allows a user to plan for a retirement with more flexible retirement options. These include gradually phasing in retirement income, taking into consideration income from a part-time business, as well as factoring in earnings from real estate.

If you plan to use a retirement calculator you should keep in mind that retirement calculators rely on assumptions about the future that may turn out to be wrong, according to economist John Turner, director of the Pension Policy Center in Washington, D.C. He has studied the design and performance of calculators.

“Calculators differ. If you’re really serious about using them, you should try two or three calculators to see how results vary,” Turner says.

One of those key assumptions is the target replacement rate. That’s the income you need in retirement to live comfortable expressed as a portion of your pre-retirement income. For example if a couple earning $80,000 a year anticipates they will need $64,000 a year in retirement, that would represent an 80 percent replacement rate.

Replacement rate income targets usually range from 70 to 90 percent of pre-retirement earnings and they often include Social Security as part of retirement income. If the target rate is set too low, you may not save enough for future needs.

Some people may want to have a cushion in their retirement assets for unexpected expenses, especially unpredictable health care costs.

Retired software developer Darren Kirkpatrick tested several calculators in 2012 and found the forecasts less than convincing. He found that “most retirement calculators don’t work.”  Kirkpatrick, who retired early at age 50, evaluates retirement calculators and posts his views online at a site titled Can I Retire Yet?

Kirkpatrick points out some common problems. Some calculators err by relying on inflation rates that are too low for the long term and err again by assuming a rate of return on investments that may be too high. “[That] gives you a bit of insight into where you stand financially today, but it tells you virtually nothing about what will happen in the future,” he has stated.

According to Todd Tresidder, founder of FinancialMentor, inflation is one of the greatest threats to retirement. “It’s a hidden tax on savings. You have no control over it. It can’t be predicted. It gnaws away at an otherwise healthy retirement like cancer to a healthy body,” he has stated. 

Given the uncertainties inherent in predicting the future, retirement calculators will always be subject to error. Even so, they can be helpful in giving a big picture view of how much you need to save. As you get closer to retirement, retirement calculators will likely prove to be more accurate in their forecasts.