Retirement calculators often little short of misleading: report
What’s all the fuss about retirement planning?
All you have to do is go online to any number of web sites, key in some basic information, and seconds later, there’s your retirement mapped out for you. It’s easier than ordering pizza.
But can you count on those results?
Probably not, according to a recent study from the Society of Actuaries which suggests that most web-based calculators are seriously flawed.
The biggest problem is that they use rates of return that are way too optimistic, either due to established defaults, misuse of averages, or the fact that they allow overly-optimistic users to pick their own numbers.
The better ones don’t use average historical rates of return at all. Instead, they analyze what would have happened if you retired in 1971, in 1972, in 1973 and so on. They then calculate how often your strategy would have panned out historically.
Since the penalty for outliving your money is greater than the one for leaving too much behind, it pays to use fairly conservative assumptions.
Nor are most calculators much good when it comes to life expectancy. In fact, they’re are all over the map when it comes determining the length of retirement that’s going to need to be financed.
Some insist on a 30-year retirement while others specify that retirement would last until age 95. Some services actually allow you to estimate your own life expectancy, which can be a real crap shoot.
And then there’s government benefits, an important gap considering that government pensions form the cornerstone of many investors’ retirement income, the SOA maintains.
Some calculate government benefits based on the person’s birth year, expected retirement age, and a single year’s pay. This method doesn’t account for fluctuations in earnings over workers’ careers, even though CPP payments are calculated this way.
By Gordon Powers, MSN Money