Financial Briefs – The Problem With Retirement Calculators.

Finance Briefs are a new section here at retirement is possible. They are short posts, generally only 500-600 words, covering a very specific topic. The idea is that you can quickly see a bit of news, find out how to solve a problem, or get a new insight. Let me know what you’d like to see in future Finance Brief posts. To see more Finance Brief posts check out the Finance Briefs Index.


The Problem With Retirement Calculators.


Understanding how much money you need and how much you’ll have to meet your retirement needs are the hardest parts of retirement planning. Retirement calculators are a great way to estimate those needs. There are a lot of very good retirement calculators out there. Two of my favorite are Vanguard’s Retirement Income Calculator and FIRECalc.


Retirement calculators are a great place to start, but they can be very misleading. Especially as you gain a stronger financial base. You may need more or less than what they estimate. And you may have more or less when your retire than they estimate. Here are some considerations when doing your planning.



How much will you realistically need? Most people only need 50%-80% of their preretirement income. Many people need far less. Some with health issues may need more. As you get older that percent may change as well.

Your house.

If you own a home then you may have your house paid off when you retire. This can greatly reduce how much you need. You can also sell your house and move to a smaller home when you retire. This will reduce the amount of money you need in retirement and may add a bit to your savings account.

Pensions and Social Security.

Most calculators don’t take these into account, or they may not do it in a way that works for your situation. Social Security can be a large part of your retirement account. Check out my post The True Value of Social Security. Use the Social Security Administrations calculator to estimate what you’ll get.

New expenses.

Retirement may mean new expenses like travel and increased medical bills. Consider the roll of medical insurance and Medicare in your retirement funding needs.

Return in the market.

This can vary a lot. Even long term rates can be different. Retirement calculators use rates between 5% and 12% to estimate growth of your portfolio. They both can be real, but won’t match your unique situation. Use a calculator that runs several scenarios. FIRECalc does this. Many others do. A Monte Carlo simulation is one type. A Monte Carlo simulation doesn’t perfectly simulate the market, but it gives you a general idea of the range of possibilities.


Inflation is an unknown. Many calculators assume about 3% inflation. Depending on how you estimate the inflation rate the real inflation could be closer to 4.5% over the decades of your retirement.


What to do about all this?

This just scratches the surface. Look at your situation. Use a retirement calculator that allows you to make adjustments to the assumed numbers. Then check several different calculators. You’ll start to see trends. If you compare that to something like the 4% rule then you’ll be able to get a general idea on how much you’ll need to save. Finally, be conservative. It’s better to overestimate a bit. But don’t over do it. Estimating a range based on each of these factors can give you a better idea of what you really need to have and how much you’ll actually spend.


What are some other problems with retirement calculators? How do you adapt to them?

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