“You’re on track to a healthy retirement.” “You need to increase your contribution to meet your retirement income needs.” At one time or another you’ve probably seen quotes like these either on your 401(k) website or after looking at a retirement income calculator. The quote was likely accompanied by data illustrating how much income you will have in retirement or how short you are from your retirement needs. The results of retirement calculators can be reassuring or alarming depending on your situation. But have you ever taken the time to look at the assumptions a calculator is making? A recent study completed by Corporate Insights suggests there’s much to be cautious about when using retirement calculators. After studying 12 independent, publically available retirement calculators, Corporate Insights found that depending on the calculator an individual uses, they could have drastically different results. One calculator may make your retirement look rosy and another may make your retirement look like you’ll have to tighten the belt.
So what causes such drastic differences to the results of a retirement calculator? Common retirement calculators rely on users to provide a series of simple inputs (i.e. age, desired age of retirement, size of portfolio and life expectancy) to develop their output. But often times there are additional assumptions (i.e. average investment return, inflation rates, and taxes) at play that can have a large effect on the output developed by retirement calculators. If one calculator assumes an average portfolio return of 5% while another assumes an average portfolio return of 7%, the results will be drastically different. A client with 7% annual returns would probably look at the results and get a false sense of security while a client who is similar in every other way may stress about what to do next if their calculator shows 5% average returns.
It’s important to remember that while retirement calculators can be great tools, they are just calculators. They are programmed to process a series of inputs with their programmed assumptions to develop an output. Calculators are limited by their design and can’t see any part of your retirement picture beyond what you tell them in your input. The information from a retirement calculator can be valuable but it should be taken at a grain of salt. It’s important to always look at the assumptions a retirement calculator makes to develop its projection before coming to any conclusions about the output.
At Modus Advisors we can always help to provide a more reasoned, human look at your retirement to help you plan for your future. We are always willing to help!
A copy of the Corporate Insights study referenced here can be found at http://go.corporateinsight.com/retirement-tool-results-analysis.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.