How to choose and use a retirement calculator

(MoneyWatch) Welcome back to my third post on retirement calculators, online tools that help you determine how much to save for retirement. My first post showed the wide range of contribution amountsthat the different calculators might suggest for you, while my second post provided in-depth results about each calculator and identified two of my favorites.

This third post provides some tips for selecting and using calculators so you can determine just how much you should save for retirement, given your circumstances and just how much information you need to provide.

Retirement calculators can vary widely in the number of questions they'll ask you. In theory, the more questions a calculator asks, the more accurate the results will be. But any estimate is only as good as the assumptions you make, which can often turn out to be much different from your actual experience. For people who are a few decades away from retirement, I doubt if much accuracy is gained when you're asked a lot of questions about factors you can't control or don't know much about.

For example, some calculators ask for your input about future rates of inflation, rates of return on your retirement savings, your marginal income tax rates today and in the future, and so on. Now if you're an economist, financial advisor, or actuary, you might feel comfortable offering an answer to these questions -- you might even feel frustrated by a calculator that doesn't make it easy to input your own assumptions.

But most people's answer to these types of questions is, How the hell should I know? If this sounds like you, you might be more comfortable with a calculator that makes these assumptions for you. So look for a calculator that matches your level of interest in attention to detail.

Regardless of the level of detail in your retirement calculator, be sure to look for a calculator that shows its default assumptions and makes it easy to change these assumptions. With some calculators, that's difficult, and I'd avoid any calculators that make it hard to understand their assumptions.

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You'll also see a wide range of sophistication in the results. Some simple calculators will just tell you how much to save, while others will give a range of estimates based on more complicated Monte Carlo analyses. In this latter case, you'll see the odds of success of different strategies. For instance, you might see a contribution strategy that gives you a 50 percent chance of success or a 90 percent chance of success, or some result between.

While a more detailed Monte Carlo analysis gives the appearance of increased sophistication, eventually you'll need to choose a specific amount to save. If you really want to be safe, you should save the amount that gives you a 90 percent chance of success, though it's likely that will require a boatload of savings. If you just want to get in the ballpark -- and you can make adjustments in your life as you age -- you might be comfortable using a 50 percent chance of success, though I wouldn't go any lower.

Because your results can vary based on the various assumptions the program makes, I'd suggest you use two or three different calculators and compare the results. If they produce different answers, it's probably not the case that one is wrong and one is right; each will use its own methodology and assumptions. Understand how each works so you can understand the reasons for the differences in output. Eventually you'll probably settle on a favorite calculator, which is fine, but you should do so only after you've initially made the effort to investigate a few others.

Every two or three years, revisit your calculations of how much you should be saving and run the numbers again. Your new answers can reflect how your investments have performed since your last calculations as well as any changes in your life circumstances, such as marriage, children, or divorce. Also, you'll be a few years closer to retirement and can refine some of the assumptions that you make.

Here's one last piece of advice: Hang in there! I've used many retirement calculators, and it's often the case that I've been initially confused about how to answer some of the questions or how to interpret the results. I've had to look at the explanations of terms, read the FAQs, or call the help line before I finally generated some meaningful results that I could understood -- and I'm an actuary who specializes in retirement. 

Stay tuned for my fourth and final post in this series, which will coach you on how to answer some common questions asked by retirement calculators.