The Danger of Online Retirement Planning Tools

Many clients enter our doors on the brink of retirement–they have made plans to retire soon, but before following through with them, they seek validation that their savings are sufficient to meet their goals.  Sometimes, after a thorough analysis of their financial situation, we are able to encourage them that their plans are sound and reasonable, and other times, we are forced to deliver the unwelcome news that the plans must change.  Either they must work longer, spend less in retirement, downsize their home, or somehow make up a shortfall between what they have and what they need.  In such meetings, we often find that at some point, the clients have been led to have greater confidence in the adequacy of their savings and financial situation than perhaps was warranted.  This can occasionally be the result of brokers, who generate a “financial plan” with very little information from the client and lots of assumptions, or online financial planning tools that do the same.

Several academic and financial publications have recently published articles outlining the dangers of retirement planning calculators.  While it is tempting to try to obtain a simple answer of whether you are on track for retirement by entering just a few pieces of data, the problem is whether you can trust the answer.  In one study, professors from Texas Tech and Utah Valley University evaluated 36 online retirement planning tools and found them to be overly simplistic and often misleading.  They analyzed the results from the online tools for a hypothetical couple in their late 50s and found that more than 2/3 of them ran contrary to the result they obtained using more complex financial planning software.  In another study, a research and consulting firm tested a dozen free retirement planning calculators and found that their projections for its hypothetical investor’s retirement income varied wildly–from $3,772 to $6,013 per month!

An example (below) from an established retirement plan sponsor, demonstrates some of the problems with these tools.  Their retirement calculator is relatively thorough as compared with some other online tools, since it asks not only about age, income, current retirement savings, and retirement age, but also allows the user to indicate his or her expected rate of investment returns as well as to include future income and Social Security projections.  However, the calculator misses many elements that could radically impact whether the user is actually “on track” for retirement.  It does not take into consideration the person’s prospects for longevity, projected changes in income, tax bracket, debts, living expenses, family situation, etc.   It makes assumptions about Social Security benefits based on the person’s current income, rather than their complete earnings history.  It assumes that all users will need 70% of their current pre-tax pay for living expenses in retirement, when this percentage can vary significantly based on your marital status and number of dependents, among other factors. 

Even more problematic is that the version of this calculator that appears on the website for users of its retirement plan services is even more simplistic, not even considering outside retirement accounts and other sources of retirement income.  Further, it fails to explain or even specify the assumptions–e.g. regarding investment returns, inflation, salary growth, and income replacement rate–that are embedded in the tool.

In prior posts, we have discussed general rules of thumb on how to determine an adequate amount to save toward retirement.  These guidelines are appropriate to use early in your career when you may not have the resources to engage a financial planner and have too many unknowns in your future to make retirement planning a worthwhile exercise.  However, as your career progresses and retirement assets build, make sure that you consult a trusted professional, rather than just an online tool, to verify that you are on track to meet your goals.  Seeking just an easy answer to a complex question may be a risky proposition.