There are several free or low-cost online retirement calculators available to the public. As a consumer, one would hope that these calculators at least provide some reasonable estimates of how much you need to save and if you are on track to meet your spending expectations in retirement. Unfortunately, a recent academic study by three Texas Tech University researchers and one researcher from Utah Valley University concluded that these tools are generally not very helpful in providing reliable information regarding retirement readiness. To us, retirement readiness means our client has defined their lifestyle vision and has worked with us to create a plan to meet those goals.
If you have ever used one of these online tools, you might have noticed how little information they require. Most of them ask very basic information about when you want to retire, how many assets you currently have, and how much you are currently saving. Once you receive the results (which may just say something along the lines of “Congratulations, you can retire”), it is often difficult to determine what assumptions the calculator is using to determine the results reported.
The study titled “The Efficacy of Publically-Available Retirement Planning Tools” analyzed 36 online retirement planning tools and compared the results to the widely used professional financial planning software, Money Guide Pro. They found two-thirds of these tools do not properly account for many critical variables such as inflation rates, longevity, future investment returns, etc.
Here at AWMI, we use Money Guide Pro and focus on goal-based planning. To that end, we include the critical variables outlined in the study that are overlooked in some other online retirement calculators. In fact, we use very conservative assumptions for inflation, investment returns, longevity, social security cost-of-living adjustments, and the list goes on.
There are many individuals looking for retirement advice that may not have access to professional services like those that we offer. We are hopeful that the results of this manuscript will urge companies that offer retirement calculators to evaluate their assumptions and implement the recommended updates. While online tools may be a way to inch into your retirement planning, hiring a professional produces tangible benefits, a sustainable plan they create with you, and the intangible peace of mind that you know you have a secure future on your terms.
Kim Butler, CFP®
Associate Financial Planner