Hidden Dangers in Relying on Retirement Calculator Assumptions
Your real retirement outlook depends on overriding a calculator’s default settings
Blindly relying on what an online retirement calculator spits out about your situation could put your retirement at risk.
Every calculator has to make assumptions— about market returns, about how much you will be able to save each year and, ultimately, how long you will live.
The calculators offered through your workplace retirement plan, or the brokerage where you’ve got your IRA parked, plug in generic assumptions that are typically based on long-term data.
In another column I covered the pitfalls for people nearing retirement who have assumptions that are likely far too optimistic for the coming decade.
There are other embedded assumptions to look out for:
What you will save between now and retirement. Every calculator will ask you when you expect to retire. And it will assume you keep contributing to savings between now and that date. Moreover, it will keep adjusting your contribution rate each year assuming you will be in line for raises.
That’s a problem. Even if you hope to work until 67 or 70, that may end up being a tad optimistic. Very few of today’s retirees worked that long. Moreover, being able to save, and save more each year until you retire, may not be in the cards. A survey of government data by the Urban Institute and ProPublica reports that more than half of people over the age of 50 experienced a layoff, and only 10% landed a new job that paid as much. Lots of us want to keep working, but many of us don’t manage to pull it off.
How long you will live. These days most calculators assume you will live to 90. That’s good. But you may want to see how things would look based on living to 95; that’s no longer a black-swan event. Have parents or grandparents that lived into their 90s? OK, if you want to play it safe, you might want to reset a calculator to a life expectancy of 100.
Your retirement tax rate. Some calculators go the extra step of showing what your net monthly retirement income might be after paying tax on withdrawals from traditional 401(k)s and IRAs. If the default rate is much lower than your current federal rate, you probably want to change it in the calculator. It’s impossible to know what your tax rate will be when you retire, but the more you have saved, the more taxable income you will have in retirement. That suggests your tax rate may not be appreciably lower. And keep in mind that today’s tax rates are near historic lows and are scheduled to expire after 2025.
The good news is that the vast majority of calculators allow you to adjust many of the variables. Playing around with different assumptions — increasing your life expectancy and/or decreasing how long you will continue to make contributions to your retirement accounts — can give a more realistic picture of where you are and where you might land. Do that now, and you have time to adjust: save more, spend less and get your body moving more, as a healthier you may be able to work longer, let alone enjoy retirement more.
Given that your retirement success is so sensitive to the assumptions you use in your planning, it may be a solid investment to have a pro go through it all with you. Your workplace retirement plan may offer some sort of consultation/counseling. That might be a good place to start.
Another option is to hire someone with retirement planning chops who promises to work as a “fiduciary.” That’s just the industry term for someone who puts the client’s interest above their own. (The certified financial planners who belong to the Garrett Planning Network will work on a project or set-fee basis; they’re all fiduciaries. That’s not an endorsement, but a lead on where to start looking for qualified help.) I’ve covered the how-to of choosing a financial advisor here.