Unearthing A Basic Retirement Calculator That Meets Your Need

Posted on | December 12, 2008 | Leave a Comment

Planning for retirement and estate planning is complicated enough. But it seems like every investment advisor and 401(k) company has been rolling out a new and complex retirement planning tool every week while forgetting the need for a basic and simple retirement calculator.

The problem is – they’re not simple. Every week, they get more and more complex and yet, at the same time, harder to use and control.

Despite the increasing complexity and sophistication of these free retirement calculators, they can all produce different results, varying from dizzyingly confusing to overly simplified. One may make adjustments for disappearing expenses (college tuition or mortgage payments) while another won’t.

One site might allow for variances in state income tax rates while another will account for inflation. One site could ask you to list every asset you have, while another just wants the basics.

And if you don’t understand the results – or get the right ones – it could put your retirement at risk.

Underestimating how much you need to save could leave you with a retirement shortfall, while overestimating can cut into your money now – meaning you have to sacrifice expenses like college tuition or extra payments on your mortgage.

Despite all the risks, you can get quite a lot out of simple retirement calculator programs. To learn the basics, read on.

Use More Than One

Relying on a single retirement calculator is retirement suicide. It’s called getting a second opinion. So, try out several of these free online tools and compare the results. Pay attention to the questions each asks you and get a feel for how they arrive at their conclusions.

Combine the Results

You also have to look at how each of these calculators evaluates your results and then merge all that diverging advice. For example, Morningstar, a company that advises 401(k) plans, estimates that people need about 70% of their pretax and preretirement income. Meanwhile Fidelity’s online tool suggests you need about 85% of that income. That’s a major difference and can result in two vastly different recommendations for savings.

Look For Features, But Not Too Many

Customization is great as it allows you to fine tune a retirement calculator to your own personal needs and financial situation, but it can also make the process more complicated. Try a calculator like the one offered by the Employee Benefits Research Institute (choosetosave.org).

It allows you to input extra income sources and potential expenses like travel or lifestyle choices that could affect your savings needs. At the same time, it’s simple and easy to follow.

Talk to a Financial Advisor

Yes, a financial advisor will charge you fees and commissions, but if you’re having doubts they can be your best bet. Most people wouldn’t leave the fate of a mysterious illness in the hands of WebMD (as helpful as it is), so why would you leave the fate of your entire retirement plans in the hands of a simple retirement calculator?