Top Tips for Using Retirement Calculators

This post offers tips for using online retirement calculators. It follows my prior posts, How to Choose the Right Retirement Calculator for You and Retirement Calculators: Should You Use Monte Carlo or Deterministic? The latter post gave tips on using each type of calculator, so here we'll cover additional tips.
Using retirement calculators takes some time and effort, and you should prepare yourself for some frustration. But the results will help you determine just how much money you need for retirement -- and how much more you need to save to reach your goal.

I've looked at many retirement calculators and have often been initially confused about how to answer some of the questions or how to interpret the results. I had to poke around for awhile, look at the FAQs or the troubleshooting section, or call the help line before I finally understood how to use the system -- and I'm an actuary who specializes in retirement! So my first words of advice are "hang in there."

Next, don't make the common mistake of assuming that the projections must be right because they were produced by a sophisticated computer program. All calculators prepare estimates of future results based on various assumptions. Often these assumptions are based on historical data, but these assumptions can easily turn out to be wrong if the future turns out differently from the historical data. No model can take all possibilities into account -- even the most sophisticated computer models use simplifying assumptions that may overlook possibilities that might actually happen later .

Because your results can vary based on the various assumptions the program makes, I would 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 OK, but only after you've initially made the effort to investigate a few others.

Many calculators ask you how long you expect to live. To answer this question, instead of guessing, it's a good idea to use one of the online life expectancy calculators, such as or Then add five to 10 years to the number they give you to make sure you'll have enough resources in case you live longer than expected.

I prefer calculators that let you itemize different kinds of living expenses, instead of totaling all your expenses or using a percentage of your pre-retirement income (called a replacement ratio). Itemizing your expenses offers a more accurate view of just what you'll be spending your money on. Here's something else to keep in mind: When entering your expected living expenses, don't overlook large, future, "one-time" expenses such as the cost to replace your car, the roof on your house, your refrigerator, etc. If you'll be retired for 20 or more years, such replacement items are inevitable. You'll also want to factor in the possibility that you might have high expenses for long-term care in your later years. Finally, if it applies to you, factor in the possibility that you'll be spending money on dependent parents.

Here's a particularly important tip: Some calculators choose for you the method of converting retirement savings to annual retirement income. This might be OK if you're more than 10 years away from retirement and you just want to see if you're on track. But once you get closer to retirement, you should be thinking about the method you'll use to withdraw from your retirement savings, and project your retirement income using that method. I described three possible ways to convert retirement savings into income in my prior post, Make Your Money Last for Life. You'll want to use a calculator that gives you the estimates that best fit your goals.

Finally, when making decisions based on computer projections, keep the following in mind: The future disappointment and damage to your life that will occur if you fall far short of forecasts is much greater than the potential excitement and gains of exceeding these forecasts. This means you should adopt strategies that have a very high chance of producing an income stream that covers your living expenses for the rest of your life, no matter what happens in the economy and no matter how long you live.

I know all of the above sounds like a lot to keep in mind -- and a lot of work -- but it sure beats being wrong and broke at age 80!

More on MoneyWatch:
How to Choose the Right Retirement Calculator for You
Retirement Calculators: Should You Use Monte Carlo or Deterministic?