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.
Looking for a better way to study the future? Try either Firecalc or the Retirementoptimizer, an excellent made-in-Canada solution.
Do you ever try to calculate your financial future? Or are you too busy dealing with the present to worry about retirement?By Gordon Powers, MSN Money
Posted by: diane10 | Aug 30, 2021 12:41:39 PM
I would never use a retirement calculator. I have looked at them for fun, however as the article states they are prone to many flaws. Perhaps one of the largest things they don't take into consideration is the effect inflation has on your investments. As for looking at the Canada Pension Plan to solve our retirement needs, I think most people realize that even if they have been paying into it for 30, 40 years, it will not sustain them in this present environment of high taxes and costs. The best way to save for retirement is to start EARLY - i.e. with the first job. It takes discipline, but most young people could put aside a small amount every week and increase as they grow older. The problem is we are a society of increasing debt - fueled by a need to purchase every new shiny thing that comes on the market. Perhaps if we curbed this behaviour we could enter retirement securely.
Posted by: Tax Guy | Aug 30, 2021 2:43:05 PM
As a well trained financial professional I agree that many of these calculations are wildly inaccurate. About 5 years ago I was at my main bank (I won't name names but they are a large national) and as I was getting my first mortgage they recommended I sit down with a retirement specialist which seemed reasonable.
Thus began the longest hour of my life as the "retirement specialist" had little understanding of investments or finances beyond what she put into her custom made program. It started with asking what my current salary was and it indicated that that would be my salary (with inflation) for the rest of time. I tried to explain to her that my wage would more than double in 5 years (in actuality it only took 4) but I was told that their system only modeled wages increasing with inflation so thats what would be entered.
Next she brought out an Andex chart and attempted to show me how graphically stocks weren't that much better than bonds over the long run and that she recommended bonds as investments. I don't know if anybody else has ever really looked at an Andex chart but it has a logrithmically increasing scale meaning that while stocks returned 8X as well as bonds over the last 50 years in the chart it only looks 30% better visually. When I mentioned this she had the decency to look abashed and then said that stocks are still more volitile and far riskier (tell that to people holding Icelandic bonds). Not to say a balanced portfolio isn't important but I was awe struck by the spin.
Lastly she wouldn't include any growth in property values or any other items that potentially could have very large impacts on my retirement. Again the software wasn't designed that way so it had no bearing.
In short I got an education that day but it was an education that many people (including some "retirement specialists") have absolutely no idea about retirement. I would always be very concerned when the "specialist" has to completely rely on a premade software and is unable to model in even the most basic of differences (ie open excel and show you the potentials).
Retirement planning is simply accepting less now to have more later. You have to try to draw the line to ensure that you have enough for retirement but still have a decent life getting to retirement. The age old plan of starting early is always a good idea but beyond that I really recommend personally investing time and effort into undertanding finance. The alternative is to put your trust into somebody that might not have a clue what they are talking about.
Posted by: Ross | Aug 31, 2021 8:10:38 AM
Retirement? What's that?
Posted by: Mark L. Fox | Aug 31, 2021 10:31:10 AM
I really like your article on financial planning and thought maybe you readers would be interested in a free retirement planning calculator called Nest Egg Software www.NestEggSoftware.com .
It allows you to change things like retirement year, annual retirement income, and return rates for different baskets of money and see the results instantly.
Here is a quick overview of the software:
http://nesteggsoftware.com/blog/2010/04/retirement-planning-software-quick-start-guide/