5 Things That Retirement Calculator Won’t Tell You

Have you seen that commercial about the couple who will do just about anything to avoid doing a retirement needs calculation? Well, here are five things that individuals should know about sitting down and doing that retirement plan – that might overcome those fears.

It won’t take as long as you think.

Now, a lot depends on which calculator you use, how complicated your financial situation is, and how much thought you’ve given to the subject before you sat down in front of the calculator. However, things will go a lot faster if you have a sense of when you plan to quit working, and if you have taken the time to pull together the statements from your 401(k), IRA, etc.

Odds are you are looking at an hour, tops, if you’re “ready” and uninterrupted.

It’s all about the assumptions.

Predicting the future is an uncertain business, but predicting future financial needs can be done with some precision if you are willing/able to make certain assumptions about that future, or to allow experts to make them on your account. Perhaps the most important assumption is when you plan to quit working; today most Americans are doing so at 62, though 65 seems to be the most common assumption – and while using 70 (or later) will sure help your projected outcomes, it may not be realistic for many individuals. Additionally, most retirement planning calculators will derive your post-retirement income needs as a percentage of your pre-retirement income reality, and for those at least, an approximation of your pre-retirement income is essential.

Two other key assumptions are how much your current savings will grow, and how quickly (and when) you plan to drawdown that savings. Many calculators will attempt to provide assumptions for the former, though you’ll want to mind that those assumptions aren’t overly optimistic based on how you’ve actually invested your savings, and your rate of contributions.

As for the latter – many calculators imbed the rate of withdrawal as an assumption; they project the amount you will need to have set aside based on an assumption not only about how much you will need, but how much you will withdraw and when. If so, try to find out what that assumption is – it may be out of date.

Different calculators can give different results.

A recent study of a dozen different retirement calculators finds as much as a 60% spread in the amount of monthly income projections – and an even bigger gap in estimating income goals. That mirrored the conclusions of a separate study that found that retirement calculators provide “highly variable” results, concluding that, in most cases, the available offerings are, extremely misleading.

As noted above, those differences were the result of differences in the assumptions made by these calculators. Those assumptions are included to make the process easier – the more assumptions made by the calculator, the less the user has to come up with on their own. And, let’s face it, some of these variables many individuals aren’t comfortable or equipped to do on their own anyway.

What that also means, however, is that if you are doing this by yourself, you might want to use more than one calculator – think of it as getting a second opinion – and see which outcome seems most reasonable. Or, better still, review it with a trusted financial advisor.

You’ll feel better after you have done a calculation.

The concerns and trepidations that individuals have about this process – as illustrated with great humor in the Nationwide commercial – are nearly universal. That said, the 2013 Retirement Confidence Survey (RCS) found that 31% who have done a calculation, compared with 14% who have not, say they are very confident that they will be able to accumulate the amount they need, while 12% who have not done a calculation, compared with 3% who have, report they are not at all confident in their ability to save the needed amount.

This increase in confidence has been found even though those who had done such an assessment tended to set higher savings goals.

You’ll also probably be better off afterwards.

It’s more than about just feeling better, of course. According to a separate 2013 analysis by the nonpartisan Employee Benefit Research Institute (EBRI), families in the highest income quartile increased their chances of being retirement ready by 14.7% when using a calculator. Families in the lowest income quartile increased their chances of being retirement ready by 14.6% when using a calculator.

However, fewer than half of workers responding to the RCS have completed this assessment, and many of those who have made an attempt to figure out how much they might need only guessed. Predictably, individuals who guessed how much they needed to save for retirement had the worst outcomes.

And they probably worried more about it as well.

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