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Beware Online Retirement Calculators

Many leading financial institutions offer free web-based calculators that attempt to gauge your retirement readiness based on current savings and future income expectations. By asking you to answer just a few questions, most of these tools propose a simple savings strategy and then indicate the level of income you might expect once you retire.

Unfortunately, it turns out that these simple calculators are likely misleading many investors about how well prepared they will be for retirement. In a study published by Texas Tech University [1], researchers recently confirmed prior academic findings that these easy to use tools can be “extremely misleading.” By analyzing the efficacy of 36 of the leading publicly available retirement calculators, the study finds that most overlook critical variables required to guide realistic retirement projections, and that their results vary greatly.


"The stakes are too high to be lulled into a false sense of security by a simple, one-size-fits-all tool..."


This research echoes another recent study released from Corporate Insight [2] which compared the outputs from 10 publicly available retirement planning calculators from companies including the Principal Financial Group, Prudential Financial, Vanguard Group and T. Rowe Price. Using the same underlying assumptions for a hypothetical investor, researchers saw dramatic variability in results -- up to 60% difference across monthly income projections, and up to 85% in retirement success outcomes. This analysis suggests that investors should be wary of such simple tools and not take their results at face value.

Part of the reason for this dispersion in results is the variability of data that each calculator asks for and the computations each elects to perform. For example, the Texas Tech study identified more than 24 key questions that should be considered in any retirement planning calculator. Most online calculators rely on the answers from just 3 or 4 to predict your probability of success. A much more complex list of variables and computations is needed to develop a prudent retirement plan. Beyond a person’s age, expected retirement date and current income, for example, plans need to comprehend life expectancies, changes to pension and social security income, rates of inflation and a range of possible investment returns. Beyond just the size of a person’s current nest egg, calculations need to take into consideration where those savings reside -- for example, whether they are in tax-sheltered or after-tax accounts -- since the impact of taxation can dramatically change retirement outcomes. The list goes on and on.


"...research indicates that current online tools are no substitute for professional advice."


Given the complexity of retirement planning, perhaps it is not surprising that simple online calculators are so limited. But when you consider the wide disparity in results that these simplistic tools produce, it is troubling to imagine an investor making long term savings or retirement decisions based on them. One calculator might tell an investor, for example, that their current savings strategy puts them on track for a long and fruitful retirement, while another, using the same information, might tell them that their plan is destined for failure. Which does the investor believe? The stakes are too high to be lulled into a false sense of security by a simple, one-size-fits-all tool, or worse, to become so disheartened that one takes no action to plan at all.

While no one can accurately predict the future, and no amount of planning can guarantee success, working with a financial advisor [3] to develop a retirement plan has been shown to dramatically improve financial outcomes for many investors. Even though the use of simple retirement calculators may be useful to get an investor pointed in the right direction and on the path to retirement planning, research indicates that current online tools are no substitute for professional advice.



[1] “The Efficacy of Publicly-Available Retirement Planning Tools,” Dorman, Taft and Mulholland, Barry S. and Bi, Qianwen and Evensky, Harold, 2016.

[2] “The Looming Problems with Retirement Planners,” Corporate Insight, 2016.

[3] "A Comparison of Retirement Strategies and Financial Planner Value,” Journal of Financial Planning, November 2014.

See Disclosures.

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