You may have noticed that more and more financial services firms are adding free, easy-to-use planning calculators to their websites. These span a variety of areas but one of the more popular tools is a retirement planning calculator.
You may have even used these yourself as a quick gauge for assessing your progress toward being ready for retirement.
I have too. It’s interesting to compare the results from different calculator tools. And they make it quick and easy to do so.
That’s where the danger lies. Many of these free, easy-to-use calculators are much too simplistic. Or they rely upon data assumptions of the user’s own choosing, whether realistic or not.
Three areas quickly come to mind as examples where these calculators typically fall short in generating adequate assessments: taxes, health care expenses and inflation.
Taxes
It’s easy to overlook the future impact from taxes when assessing income levels many years into the future. Many folks firmly believe they will be in a lower tax bracket during their retirement years. And for some, that is indeed the case.
However many people may underestimate the value of the growth of their retirement savings 20 or 30 years down the road. Or they may not realize that some portion of future social security benefits will be taxed. Or that required distributions from certain retirement savings accounts will also be taxed. Instead, it’s easier to just automatically presume that future taxable income will be minimal, hence the failure to adequately assess the future impact from taxes.
Some calculators have no means for assessing the impact from future taxes, leaving users to make their own best guestimates.
Health Care Expenses
A second area that’s often overlooked is the true impact from health care expenses during retirement years. It’s easiest to presume that health insurance premiums will remain at about the same levels as were present during working years. And that the expense amounts we need to pick up out of our own pockets will also remain at comparable levels to those from our working years. Yet that’s frequently not the case; rather, future expenses related to health care is one of the biggest surprises that most folks face.
Inflation
The third common area of oversimplification is inflation rates. I say “rates” because different expense categories tend to inflate at different levels. Unfortunately most of these free, online calculators do not include the ability to capture varying inflation rates for different expense categories.
Try telling a senior there is no to very low inflation present in today’s economy. They know differently, for they see it in their own costs, especially when they need to refill a prescription or require other medical care.
Small Details, Big Impact
While these assumptions may seem like small details, they can have a major impact on projections for a 30-year or longer retirement time horizon.
The next time you decide to get a quick assessment of your retirement preparedness through one of these simplistic calculators, be cautions about the results. And be realistic with yourself. Retirement planning is complex and your situation is unique. Do you have the knowledge and expertise to select meaningful data and then assess the interrelationship among the various key data elements properly?
If retirement planning is on your mind, this may be the perfect occasion to give us a call so we can work together in developing a strategic plan based upon your personal financial circumstances, goals and priorities.
Yes, we’re biased. Planning for retirement properly is crucial because most of us do not get a mulligan. We can’t go back and re-do things that transpired in earlier years. Details matter.
image credit: John Liu