Using Retirement Calculators to Make Financial Decisions

You can literally find hundreds of financial calculators on the internet.              When planning something as important as your financial future, can you rely on the results of these calculators to make financial decisions?     The next time you find a financial calculator on the internet, look for a disclaimer somewhere on the page.   It might say something like this:

CAUTION: Do NOT rely on the results from this calculator to make financial decisions.  Interest rates, your personal financial situation and the tax laws change regularly.

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The accuracy of this calculator and its applicability to your circumstances is not guaranteed.  You should obtain personal advice from qualified professionals.  The information provided is not specific investment advice, a guarantee of performance, or a recommendation.  Rates of return will vary over time, particularly for long-term investments.  Investments offering the potential for higher rates of return also involve a higher degree of risk.  Actual results will vary.

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Disclaimer: This calculator is designed to be informational and educational only, and by itself, does not constitute investment, financial, or tax advice.  We strongly suggest that you seek the advice of a qualified professional before making any financial decision.  We encourage you to review your investment strategy on a regular basis as your financial situation and the tax laws change.  This computer simulation is provided as a rough approximation of future financial performance.  The results presented by this calculator are hypothetical and may not reflect the actual performance of your own investments.  We will not be held responsible for the consequences of any decisions or actions that you take in response to the information provided by this calculator.

The typical online retirement calculator will ask you to enter financial data into the appropriate fields on the screen, such as;

To determine how much you will need to accumulate, enter

1) Annual income desired (in today’s dollars)

2) Number of years until retirement

3) Number of years after retirement

4) Annual inflation rate

5) Annual return on balance

To determine how much to save and how long it will last, enter

1) Beginning balance

2) Monthly contribution

3) Years until retirement

4) Estimated pre-retirement yield

5) Estimated retirement yield

6) Annual inflation rate

7) Annual contribution increase

8) Desired future withdrawal amount

When people use the typical retirement calculator, where do they get the numbers that they enter into the program?     For example, how do they come up with the annual inflation rates, pre-retirement returns (or growth rates) and retirement returns? How do they determine the number of years after retirement?  What if I told you that the retirement plan, based on the data entered into the typical retirement calculator, will fail 80-90 percent of the time.

Why are the results of all these online, interactive retirement calculators essentially worthless?      Why such a horrible outcome?  For one thing, the numbers people enter into these programs are inaccurate assumptions about average growth rates and inflation rates.    There is never any question or consideration as to the specific asset mix of the portfolio. Additionally, the financial data entered into the program is unrealistic and it is not based on the specific personal and financial situation of a particular person.  Even more significant is the fact that almost all of these retirement calculators do not account for a variety of other factors that can affect the value of a persons retirement investments over time.  In other words, the figures generated by the calculator are based on one static set of numbers at a given point in time.

Here is an example of the results I obtained using a typical retirement calculator on the internet.

1) Beginning balance at retirement - $ 1,500,000

2) Estimated retirement yield – 8%

3) Annual inflation rate – 3.5%

4) Desired withdrawal amount - $100,000

5) Desired future withdrawal amount (percent increase) – 3.5%

6) Number of years after retirement - 20

According to the results provided by the typical retirement calculator, the portfolio would last a little longer than 20 years.  Now, if you calculate the portfolio value using specific market data and inflation projections based on the particular portfolio asset mix over time, in most cases, the portfolio would expire well before the end of the twenty year time horizon.  The effect of this outcome is based on the randomness of the market which cannot be accounted for using simple retirement calculators available on the internet.  I do not believe that people can afford to play games with their life savings.     Plucking numbers into an online calculator to me is akin to plucking money into a slot machine.

Can you afford to gamble with your financial future?