Are you ready to start planning your retirement but can’t decide which retirement calculator to use? There are so many calculators out there that trying to find the right one can feel like wandering through a maze. And if you choose the wrong calculator you’ll short-change yourself with less-than-accurate predictions. That’s why I’ve made my way through the maze and found the cheese on the other side, having examined dozens of calculators in order to find the best ones.
Retirement calculators (also called retirement programs, retirement planners, or retirement planning tools) take your financial assets (savings, stocks, bonds, IRA), your income streams (employment, social security, pensions), and combine them with several assumptions (rates of return, your retirement age, the age you start social security) to project your financial condition over a multi-year period.
These predictions cover a wide range of factors, including how long your savings will last, how much can be withdrawn each year from your assets to fund retirement spending, or the amount of assets needed to be able to retire at a certain future age.
It’s important to select a retirement calculator that will provide accurate predictions and will allow you to account for all of the relevant assumptions. If you use an inadequate retirement planning tool, you could end up with poor projections that later lead to financial hardship.
“Good” retirement calculators are valuable planning tools
As planning tools, calculators allow you to pick the right combination of assumptions that result in your best financial condition at a certain point in the future. For example, if a calculator’s initial predictions are favorable, you can tweak the assumptions to see if you can retire at an earlier age, increase spending or delay filing for social security.
If the initial prediction is unfavorable, you may be able to improve results by moving assets to higher-return areas, delaying retirement or reducing spending. It’s important to start using calculators well before retirement to allow enough time for any mid-life financial corrections to become effective. Good calculators can be used instead of an expensive personalized plan from a professional retirement planner. However, some families may still need to seek investment advice for formulating and executing a plan to achieve their goals.
Calculators vary significantly in the accuracy and completeness of their financial projections. Those that incorporate only three or four basic assumptions generate incomplete and highly misleading results that should not be relied upon. Only those calculators that use a complete set of important input assumptions are able to accurately predict your future financial condition. On the other hand, calculators can also use so many inputs (some of which may not be understood by the average user) that they become complicated or confusing, which diminishes the value of its answer, even if it’s accurate.
It’s important to strike a balance between complexity and ease-of-use.
Types of retirement calculators
Retirement calculators come in so many sizes and shapes that it’s no wonder potential users are often confused and lost. Some retirement planners are web-based, others downloadable. Some are executable (downloadable on a computer) while some are Excel based. Some have been developed by and are linked to large financial institutions, some by independent software firms and others were developed by individuals. Some provide many supporting detailed reports and charts showing projected results while others just show the answer with no justification regarding how it was derived. Some are free, others cost money, and some want you to open an account to use. Those that are for sale may be in the form of a one-time price, an annual upgrade fee, or a monthly subscription. With so many choices, what’s a beginner to do? We’ll help guide you through the maze.
Features of the best retirement calculators
A good calculator is one that combines a self-explanatory user interface and understandable logic with predictions that are accurate and complete. And the only way a calculator can generate trustable results is to incorporate the important and major assumptions. So what characteristics should you look for? After testing and comparing more than 20 calculators, here is a brief list of features contained in the best ones:
A user-friendly interface, logical flow and understandable logic:
Users should not be required to know finance or complex financial terms to operate and understand the calculator.
A self-explanatory, intuitive user interface (where data is entered) that flows smoothly and logically.
The important assumptions should be on one page/window (supporting data that feeds the main page can be on other pages), eliminating the need to page forward or backward when changing basic assumptions.
User should be able to quickly and easily change assumptions and instantly see the results on the main page in a clear, concise way.
Instructions/help features/user guide built into the program with the ability to print the user guide.
A complete set of input assumptions organized in a logical way:
The ability to separate you and your spouse’s income sources (from employment to social security) and have corresponding start and/or end ages for each. Separating you and your spouse’s assumptions allows significantly greater planning flexibility and more accurate projections.
The retirement planning platform should have the ability to separate assets among taxable, tax-free and tax-deferred to allow various returns for each category. It should also allow each category to be broken down into stocks, bonds, or cash (or similar) to allow various rates of return for each subcategory.
It should allow for multiple sources in each income category (employment, retirement, pension) for each person.
The retirement calculator should allow the ability to separate normal expenses from one-time expenses so as not to compound the expenses of a wedding, for example.
It should automatically calculate actual social security income for both spouses at any start month and age. Don’t settle for one that asks you to input your social security.
The financial planning tool should automatically calculate federal income taxes. Most calculators do not even consider federal taxes, but for those that do, don’t settle for one that asks the user to “plug” in an estimate.
It should automatically calculate state taxes using each state’s tax rates and brackets. Most calculators do not even consider state taxes.
The retirement planning platform should automatically calculate the minimum mandatory IRA distribution beginning at age 70 as it can become an important source of income.
It should allow voluntary IRA withdrawals and automatically calculate the tax penalty if taken before age 60.
The retirement calculator should allow the saving of multiple files/scenarios so users do not have to re-key data each time the program is opened.
It should be able to display and print charts and reports showing detailed annual projections in multiple categories through the entire projection period to help the user follow its predictions.
Bonus features:
Supporting worksheets like a detailed annual expense worksheet to more accurately determine annual expenses and/or a worksheet to calculate a weighted average return.
Real-time pop-up hints/messages that not only warn about an excessive user entry but also make suggestions on how to maximize users’ social security or annual income. The ability to turn off these messages is also nice.
The ability to customize the appearance of the user interface and charts to the user’s liking.
The ability to call the company or a support line to discuss the company and/or product.
If there is a cost, there should be a money-back guarantee should the user be unsatisfied.
And the best retirement calculator is ……………
As you can see, there are a lot of things you should consider when choosing the right retirement calculator. Remember, when it comes to financial planning and software, it’s not just about ease-of-use, convenience, or slick looks. Yes, these factors are important, but if you don’t pay close attention to the underlying financial aspects, you could find yourself in a tight spot later on down the road.
That’s why we’re going to go over the best financial calculators in our next blog post.