Retirement Calculators are Dangerous! – Updated March 2014

crystal ballLife would be much simpler if you could input information into a retirement calculator and presto you have an answer that will help you make the right financial decisions for the rest of your life. Unfortunately, life is not that simple. Calculators have three major flaws. They are based on broad assumptions that may or may not be true.  They do not account for human nature. And, all of the variables that are input into the calculators is subject to change.

Retirement Assumptions

Retirement calculators require inputs to produce outcomes that may or may not happen. Step one is determining your current assets in 401K plans, IRAs, and personal savings accounts. Step two is a savings rate. What percentage of your income, 5%, 10%, 15% will go into these accounts? Step three is your biggest assumption. How will your assets perform over the next 10, 20, or 30 years? Is the number 4%, 8%, or 12%? No one really knows so it is important to base growth rates on conservative, achievable assumptions.


Sophisticated retirement calculators will have Monte Carlo simulation capabilities that determine probabilities of success for various combinations of assumptions. Make sure your financial advisor’s planning software has this tool so you can review these probabilities. The end result could be you have an 80% probability of achieving your goal. That is a lot better than a 20% probability. If you want a higher probability outcome you have to use more conservative assumptions for your savings and performance rates. Also, keep in mind, your performance assumption has to be consistent with your tolerance for risk. For example, you want to use a 12% growth assumption, but your risk tolerance will only allow an 8% assumption. This means you will have 25% less assets from growth if you reduce this assumption. Your other choice is to increase your tolerance for risk, but you have to be willing to experience increased volatility.

Down Years

Retirement calculators will project the growth of your assets years into the future. The calculator will use your average growth rate assumption to produce various scenarios. But, this assumption masks a harsh reality. The securities markets are subject to severe declines that impact you. Use 2008 an as example. Assuming 100% of your assets were invested in the stock market and you achieved market performance you would have lost 38.5% of the value of your assets. Granted, this was the third worst year in the history of the securities markets, but you have to gain 63% on your reduced asset base just to achieve a zero rate of return and it make take years. So instead of growing assets you are winning back losses. More importantly if you planned to retire on 12/31/08 you would have had to postpone your retirement date because you did not simulate a catastrophic market during 2008 – your last year in the work force.

Sales Tools

Be careful when financial advisors want to use calculators as part of their financial and retirement plans. They may rig the system so it shows you need large amounts of what they are selling. For example, your planner is also an insurance agent. Do not be surprised if the calculators produce a plan that recommends large amounts of insurance products (annuity, life, disability, health). These products produce commission payouts that are the largest in the financial service industry.

Extreme Caution

Use extreme caution when you make financial decisions that are based on these assumptions. There is a good chance your financial advisor will lead you down a rosy path that helps him sell investment and insurance products. Your financial or retirement plan may be seriously flawed because your advisor’s need to make money may supersede your need to achieve your financial goals.

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