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Retirement Calculators Can Be Bad for Your Wealth

An expert's words of warning about assumptions that go into them

By Jack Waymire

(This article previously appeared on

Life 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.

Retirement calculators have three major flaws:

1. They are based on broad assumptions that may or may not be true. 

2. They do not account for human nature.

3. And variables that are input into the calculators may be subject to change.

(MORE: 6 Biggest Risks to Retirement Security)

The Problem With Calculator Assumptions

Retirement calculators require inputs to produce outcomes that may or may not happen.

After you determine your current assets in 401(k) plans, IRAs and personal savings accounts, you need to plug in a savings rate — the percentage of your income that will go into these accounts in the future. Will it be 5 percent? 10 percent? 15 percent? Hard to know for sure.

Then there’s the biggest assumption you need to make: How will your assets perform over the next 10, 20 or 30 years? Will they grow by 4% a year?  8%? 12%? That’s impossible to know, of course. So it’s best to base your forecast on conservative assumptions.

(MORE: 8 Ways to Derail Your Retirement)

The Simulations Calculators Make

Sophisticated retirement calculators have what are known as “Monte Carlo simulation” capabilities that determine the probabilities of success for various combinations of assumptions. If you work with a financial adviser, make sure his or her planning software has this tool so you can review the probabilities of a calculator you use.

With a Monte Carlo simulation, you might find that the calculator says you have, say, an 80% probability of achieving your goal. If you want a higher probability outcome, you’ll have to use more conservative assumptions for your savings and performance rates.

Also, keep in mind, your performance assumption must be consistent with your tolerance for risk. For example, you’ll run into trouble if you want to use a 11% growth assumption but the risk tolerance level you enter in the calculator will only allow for an 8% assumption.

(MORE: Give Your Retirement Portfolio a Stress Test)

A growth rate of 12% is very aggressive, since it’s higher than historic returns. That rate suggest that you have a high appetite for risk, since the only way you can achieve such a lofty return is by taking extra risks with your money.


If you have a low tolerance for risk, you need to assume a lower rate of return on your investments, which will mean smaller asset growth. With an 8% return based on your risk tolerance, you will have 25% less assets from growth than with a 12% return.

Your other choice is to increase your tolerance for risk, but you have to be willing to experience increased volatility.

Calculators and ‘Down Years’

Retirement calculators will project the growth of your assets years into the future, using your average growth rate assumption to produce various scenarios. But, this assumption masks a harsh reality: Securities markets are subject to severe declines.

Take 2008, for example. Assuming all of your assets were invested in the stock market that year and your investments matched the market, 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 with this kind of loss, you’d have to gain 63% on your reduced asset base just to achieve a zero rate of return. That could take years.

So instead of growing assets, you are winning back losses. More importantly, if you had planned to retire on December 31, 2008 you would have had to postpone that goal because you didn’t simulate a catastrophic market during 2008, your last year in the workforce.

Calculators as Sales Tools

Be careful when an adviser wants to use a calculator as part of his or her financial or retirement plan for you.

This money pro might rig the system so the calculator shows that you’ll need large amounts of what he or she is selling.

For example, say your financial planner is also an insurance agent. Don’t be surprised if the calculator produces a plan that recommends large amounts of insurance products (such as annuities and life, disability or health policies). These products produce commission payouts that are the largest in the financial services industry.

Your financial or retirement plan may be seriously flawed because your adviser’s need to make money may supersede your need to achieve your financial goals.

Jack Waymire spent 28 years in the financial services industry. He is the author of Who's Watching Your Money? and the founder of Paladin Research and Registry. Paladin provides free information and services that help investors select top-quality financial advisers. Follow Jack on Twitter @PaladinRegistry or connect with him on Google+. Read More
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