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5 Big Flaws of Retirement Calculators, and How to Fix Them

I'm a big fan of online retirement planning calculators. Far too many people just guess at how much money they need in retirement -- and most people guess way too low. Compared to figuring it out yourself with pen and paper, retirement calculators do the math for you, so you can easily analyze how much money you need to retire, how much you should save, and how much retirement income you can expect to get from your savings.

Many retirement calculators do an adequate job of helping you decide how much to save when retirement is far in your future, say, when you're in your 20s, 30s, and 40s. At that point in your life, all you need to do is get in the ballpark of determining how much to save, because there's so much that can happen between your early working years and retirement that you can't get very precise with the "how much to save" analyses.

When you get to your late 50s or early 60s, however, and you're trying to figure out exactly how and when you'll retire, you'll need more precision. And that's when many retirement calculators come up short. You'll need to use more refined retirement calculators, or know a few "work-arounds" to get the best answer to this important question: How will you piece together various sources of retirement income to cover your living expenses?

Let's take a look at five common flaws of retirement calculators and the work-arounds to fix them.

Next: Inflexibility in choosing your method of generating retirement income

Flaw #1: You can't select the method of generating retirement income from your IRAs, 401(k) accounts, and retirement savings.
There are three different ways to generate retirement income from retirement savings:
  1. Spending just interest and dividends from your retirement investments
  2. Cautiously drawing down principal and investment earnings, a.k.a. managed payouts
  3. Buying an immediate annuity
Each method has its pros and cons, and there are many variations on each method. In addition, the amount of income you receive can vary widely among the different methods. For example, the initial retirement income you'll receive from buying an annuity can be twice as large as spending just the interest and dividends from your retirement investments, and an annuity can generate income that's 25 percent higher or more than using managed payouts.

Yet most retirement calculators don't give you the choice to pick the method of generating retirement income. Some assume you'll buy an annuity, while others assume a variation on managed payouts.

Work-Around: Learn about the various methods of generating retirement income from your retirement savings, and select the method or combination of methods that best meets your circumstances. Separately calculate the amount of income you'll receive under the method you select. Most calculators have the ability to input "other retirement income," so enter the amount you've calculated. Make sure you don't input the retirement savings that you've used to generate this income, however; if you do, the calculator will also use those savings to generate income, and you'll be double-counting the retirement savings.

Next: Problems accounting for Social Security

Flaw #2: Over-simplified treatment of Social Security income
Many retirement calculators start Social Security income at the desired retirement age that you input into the calculator. But as I've written about previously, there are good reasons why you might want to delay your Social Security income to age 70, even though you retire at an earlier age. In this case, you may want to draw on other resources to replace the Social Security income that you're delaying, such as working part time to fill in the gap or drawing additional amounts from your retirement savings.

Another flaw is that many calculators don't consider your spouse's Social Security income, if you're married. Or if they do reflect your spouse's Social Security income, they start that income at the same age as your desired retirement age.

Work-Around: Look for a calculator that allows you to start your Social Security income and your spouse's Social Security income at an age that might be different from your retirement age. You may need to separately calculate the Social Security income that you and your spouse will receive. I'd start with the calculators on the Social Security website.

Next: Overly optimistic default assumptions

Flaw #3: Over-optimistic default assumptions

Many calculators pick default rates for important assumptions, such as the rate of return you'll realize on your retirement savings and how fast your expenses will grow. One calculator I looked at assumed 8 percent for the rate of return on your retirement savings after you retire, while others selected 5 or 6 percent. While it's possible you could achieve these rates, it's also possible you won't.

Work-Around: Many retirement calculators allow you to set your own assumptions, which you should do. Given the recent volatility in stock market returns and bond interest rates, and the low returns on CDs and savings accounts, I think it's best to assume low rates of return; see if you can still retire if you earn 1, 2, 3, or at most 4 percent per year. I'd rather be prepared for a bad scenario and be pleasantly surprised if my investments do better than expected.

Next: Assumption of consistent living expenses

Flaw #4: Assumption of steady living expenses
Many calculators just assume that you'll have steady living expenses throughout your retirement, increased for inflation. But in reality, your living expenses can spike up or down, depending on your circumstances. For instance, you might pay off your mortgage five years into retirement, or you might incur higher medical expenses later in life. You might also incur one-time expenses in the future, such as paying to replace the roof on your house or purchasing a car or large appliance.

Work-Around: Look for a calculator that allows you to add or drop special living expenses at a future date. If you can't find these refinements in an online calculator, you can set aside reserves for certain living expenses by not counting them as assets that generate retirement income. For example, take the amount of your outstanding mortgage, and subtract that from the amount of assets you'll input into the calculator for generating retirement income.

Next: No accounting for temporary or part-time work

Flaw #5: Inability to reflect temporary and/or part-time work
Many people will need to work, possibly part time, for several years during their retirement, but it's likely that eventually you'll reach an age when you won't be able to work. So you might want to project your financial situation by assuming that you'll work for a certain period of years. Unfortunately, many calculators don't have the capability to show a temporary source of income -- they may only allow lifetime incomes.

Work-Around: Look for a calculator that allows temporary sources of income, such as work. Here's another band-aid: If you can't find such a calculator and think you'll earn a certain amount of wages in the future, count this amount as a retirement asset that will generate retirement income. For instance, if you think you'll earn $100,000 in wages in the next 10 years, then add $100,000 to your retirement savings. Admittedly this is a rough work-around, but it's better than nothing.

While I haven't done an exhaustive analysis of online retirement planning calculators, the Fidelity Income Strategy Evaluator seems to be the best I've seen so far, with the ability to overcome the flaws noted above. Other calculators that I've previously reviewed previously can also overcome these flaws, such as the calculators at and

While refining your calculations might seem like a lot of work, remember that you're planning for your financial security for the next 20 to 30 years. It's worth taking the time to do the job right.

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