Why Retirement Calculators Don’t Work

Recently, I had a conversation with a prospective client that forced me to delve deeper into what it is that I do.

After some back and forth, it became clear that this individual was what I might describe as a “media savvy myope.” Not particularly unique in this day and age, but traditionally, historically, maddeningly common when it comes to financial planning.

This person might be characterized as having the best intentions, doing their own research into personal finance, and taking an interest in how to get from point A to point B in their financial life.

It’s a person who’s tuned into the general advice of personal finance gurus, and probably has used one or more online retirement calculators to gauge their current and future prospects.

While I’m the first one to encourage and congratulate the initiative and interest someone’s shown in their own financial well-being, neither personal finance gurus nor financial calculators will get you to your goals, and in some cases are completely useless tools.

In nearly ten years of financial planning, I’ve never seen a client reach or navigate retirement using an online retirement calculator.

Not that it hasn’t been done. 

They’re handy and generally easy to use. They may even give you some insight into where you are on track toward retirement.

But let me explore the problems.

First off, there’s the “personal finance guru” phenomenon. We’ve all seen them on public television or listened to their radio programs. Mostly, they offer sound, general advice about personal finance and how to plan for retirement. Like retirement calculators, personal finance gurus may offer some general advice that can serve as a great starting point. 

But that’s the problem–it’s general.

Like snowflakes and fingerprints, each of our personal financial pictures is unique.  Something that’s built around and addresses everyone actually serves nobody comprehensively.

Here’s an experiment I ran recently.

I explored several of the most popular retirement calculators online and used my own financial situation to see what results I got. 

  • Two of them required providing personal contact information so I refused to use them as I wasn’t interested in fielding sales calls from the firm sponsoring the calculator (which is not to say the calculators aren’t okay, just be prepared to get solicited if you use them)
  • One had me running out of money at 68, a year after my targeted retirement.
  • One came up with an outrageous estimate of expenses in retirement (ironically, I hadn’t entered any expense information).
  • One put me at a 99% retirement success rate.
  • One put me at a 50% shortfall by retirement.
  • One said I wouldn’t make it to retirement with a single dime.
  • One said I need to save an additional $10k per month.

Why such extreme differences?  

First, and not surprisingly, many of the calculators are biased toward selling you a particular product (investment, insurance, annuity), and the calculator will lean heavily on how a product may fit into a perceived shortfall.

Secondly, retirement calculators are built on algorithms. Like Google Maps, for example.

If I want to drive from the Golden Gate Bridge to the Empire State Building, Google Maps tells me it will take 44 hours. The assumptions being made are that if I get in my car, drive at a fixed speed for 44 hours, and don’t stop or veer from the directions given, I’ll make it in exactly 44 hours.

Now, I can plug in an address ten miles from me and get a relatively reliable assessment of how long it will take to get there. In financial terms, this is equivalent to knowing how much money you have today and calculating how much you’ll have by next month.

But there’s a lot of road between San Francisco and New York City. 

You could blow a gasket in Laramie, Wyoming, forcing you to spend three days waiting for repairs. (Or you could lose a job, get divorced, or have a disability event)

You could decide that you may not want to drive on a stretch of road affectionately referred to as “Blood Alley” because it’s too risky, so you decide to detour twenty miles off the plotted course. (Are you taking risk in your portfolio that you may not have to in order to get to the same place in the end?)

You might decide to leave the route and visit the Glenn Miller Museum in Clarinda, Iowa. (Maybe you buy a rental property or get sued for liability).

The point is, San Francisco and New York will always be the same distance from each other; but there are infinite ways to get from one to the other. 

Like everyone else, I have a particular financial situation that no retirement calculator can comprehensively address. 

Some examples? 

Most financial advisors and retirement calculators plot your situation with a straight line. And nobody’s life moves in a straight line. For example, most assumptions are made that your expenses remain consistent until death but continue to grow at a particular rate with inflation. Would it be safe to assume that most people at age 80 are going to slow down a bit? Maybe travel less, go out less, consume less. A real representation of your expenses throughout a lifetime should look more like a bell curve than a smoothed ascending straight line.

Retirement calculators plot a single point in time and, while you can revisit them on occasion and enter updated information, it’s not going to give you any help with planning cash flow or retirement distribution strategies ten, fifteen, or twenty years from now. 

Most people’s understanding of cash flow amounts to knowing what they bring in each month and what goes out. But cash flow is the single most important piece in retirement and financial planning. Cash flow modeling can help you identify how much you need to save–not just this year but EVERY year. Cash flow modeling can determine the amount of risk you can take in an investment portfolio. Cash flow modeling can guide you toward tax planning strategies you wouldn’t otherwise know about from a retirement calculator’s snapshot result.

No online retirement calculator I’ve ever seen can model out how operating a business with a different tax classification will impact your personal financial plan.

No online retirement calculator can address the annual strategies a good financial planner can, such as assessing Roth conversion benefits or tax-loss harvesting in your investments, and how those things will impact your overall financial outcome. 

The point is, neither personal finance gurus nor online retirement calculators will help you with anything beyond the general.  If you REALLY want to know where you stand, where you’re going, and how to get there, consult with an advisor who specializes in comprehensive financial planning.