5 Reasons Why Online Retirement Calculators Can Fail For Baby Boomers
Give You A False Sense Of Security
There have been many advancements with technology, unfortunately, retirement calculators are just starting to catch up. However, most retirement calculators made for baby boomers are not very advanced and can actually give you a false sense of security. When you log in to your 401k or brokerage account, they will typically offer a free retirement calculator. Some financial advisors also have retirement calculators offered through their firm, but they also lack the ability to provide a good reading on your retirement. Most retirement calculators don’t take in to consideration the realities of a fluctuating and volatile stock market, taxes, Social Security, inflation, and unexpected occurrences such as an early loss of a spouse or assets needed for long term-care. That is why you need to have a written retirement plan that covers everything to give you the best success in retirement.
I have looked at many retirement calculators to help out my clients, unfortunately, I haven’t found one that does everything well. I have also noticed they all have one thing in common that gives a false sense of security after running many retirement calculators, and that is because they all have to make assumptions with your return. Most of the free retirement online calculators will tell you an income that you are likely to get when you retire, however, if you read the fine print you will find the assumptions. Usually the assumptions are that you are going to get a continuous 8% return on your money. The market may have averaged around 8% returns over the last 100 years, but typically retirement doesn’t last 100 years and that there are going to be negative years as well. It is also making the assumption that your retirement is usually 30 years and that in retirement you will also receive a continuous static return.
Calculators Are For Baby Boomers
There are more advanced retirement calculators for baby boomers where they can run what is called a Monte Carlo simulation, which is where it will look over the last 100 years, or 1000’s of periods in history of the market, and give you a rate of success with the total amount of money you have and what your income needs are. The problem is that you still have to give it a rate of return, and that rate of return is constant and doesn’t fluctuate. The S&P 500 has averaged over 7% in the long run; however, it has averaged less than 2% since 2000. That is because we had collective losses of over 50% in 2001 dot com bubble and 2008 financial crisis. This is still better than nothing, but you have to be careful with the results as they are not guaranteed.
The best thing to do is to take the calculations from the 401k retirement calculator with a grain of salt. The other programs that you have to pay for work a little better, but they still aren’t a sure thing. The best way to understand it is actually putting it in an Excel spread sheet and doing you own calculations, running multiple scenarios, but that can be time consuming. The other downside is that it won’t do everything well for you with the other aspects of retirement that most baby boomers will face.
Doesn’t Calculate Taxes
The last thing you want to think of as a baby boomer in retirement is taxes. I get it, you have worked your whole life and have paid taxes your whole life, it is no wonder why you want to get the money you saved in your retirement portfolios back with as little taxes paid as possible. One of the biggest issues with the retirement calculators is they lack the ability to let you know how to withdraw your money the best way possible with taxes in mind, and, they usually don’t tell you your net income when utilizing all your resources. The more disappointing thing is that your tax advisor doesn’t have a calculator for this either. There are a couple different calculators that will help tell you which account to pull from first, but they don’t give advice on whether or not you should do Roth conversions or take into consideration the beneficiaries, which could also change the best strategy on how to withdraw your retirement money. Any calculator that at least has some tax situations in it is better than most, but the only way to really make it work is if you understand taxes really well. That is usually where a tax advisor that specializes in retirement or a financial advisor that focuses on retirement will really pay dividends for you.
Doesn’t Tell You The Best Time To Take Social Security
One of the most confusing things baby boomers have is understanding the best time to take Social Security. Taking Social Security too early or too late can cost you hundreds of thousands of dollars. It is also a decision that is different for everyone. Most baby boomers in or near retirement think of Social Security usually on its own instead of combining it together. Most retirement calculators do the exact same thing and will exclude your Social Security or expect you to determine the best time to take it. Social Security has some tax advantages as well as other strategies if you are married. There are a few that will make suggestions on Social Security at the same time give you a projection on your retirement. Make sure you are coordinating it all together.
Doesn’t Calculate Inflation
More and more calculators are finally including inflation in the calculation, but the simple ones are still leaving it out. Think back 10, 15, even 20 years ago. How much was gas? How much was a gallon of milk? Better yet, remember when a penny actually was used as a relevant use of currency? With interest rates as low as they are today, it is important to understand that inflation could be looming as interest rates start to rise. Most retirement calculators for baby boomers do not have inflation as a factor in your retirement success. It is important to add at least some inflation in to your retirement income calculations and if the software you are using doesn’t allow for it, then it could be giving you a false sense of security.
Doesn’t Calculate Unexpected Occurrences
Last but not least are the unexpected occurrences such as early loss of spouse, long-term care needs, market fluctuations, or living longer than expected. Most retirement calculators made for baby boomers only look at investments, but have a hard time looking at the unexpected. It is important to understand the income that will left to the surviving spouse and understand how much money may be spent down due to a long-term care situation. Other retirement calculators only calculate you living in retirement for only 30 years instead of possibly living a lot longer. It is important to use a calculator for retirement, but also make sure that you don’t sell yourself short. It can be misleading if you believe you are only going to be in retirement for only 30 years. More importantly, it is very misleading if you believe that you and your spouse will around for the exact same time, or that one may use more money because of long-term care needs.
Even though there have been many advancements with retirement calculators for baby boomers, it is important to know that these retirement calculators do not offer everything needed to make sure your written retirement plan can be executed in confidence. Using a retirement calculator with a financial advisor that understands retirement planning may be the best combination for you. Keep in mind that not all financial experts spend most of their time helping baby boomers retire. It is important to align your retirement with the unexpected, investment returns and risk, Social Security and other guaranteed income sources, your taxes, and inflation. At the end of the day, if you do use any form of a calculator for retirement, you are already ahead of most baby boomers when it comes to planning for retirement.
Hi, Vince Oldre here again. I want to talk to you about the five reasons why retirement calculators can fail for most baby boomers. Number one is that it’s too simple. A lot of these retirement calculators that you can use online, they make too many assumptions. A lot of them use fixed rate of returns, and if you were around, which I assume you were, in 2001 and 2008, you would know that the market doesn’t just go at a fixed rate of return at 8%. There are going to be bumps and hills along the way. That’s why when you use too simple of a calculator, it may give you a false sense of security. Make sure when you’re using a retirement calculator it’s not going to be too simple.
That’s why you need to also point to other factors, like social security. The reason why a lot of these other retirement calculators do not work is because they don’t actually look at your overall plan. I’m not just talking about the free ones you can use with your 401(k) plans, but the ones that even that some financial advisors use aren’t going to look at everything like social security. The benefit with some of these financial retirement calculators is they will actually put your social security calculations in with your overall retirement plan. If you are going to be using one, make sure that you use one that’s going to have that social security ability to plug into your overall retirement plan.
The third reason why they’re not always the best or why it could fail is because of inflation. We have to make assumptions on inflation when we’re using the retirement calculators, but some calculators don’t even have inflation adjusted numbers. You have to be careful with inflation and make sure that if you are using a retirement calculator and it’s going to tell you what your income is that point in time, keep in mind as you go along in retirement you might not have inflation adjusted numbers. You want to make sure that your social security, your retirement calculator’s not too simple, and you want to make sure that inflation’s added into it.
The other factor that we look at is, our taxes. Now taxes, I believe, are huge. If you want the most you can get out of your retirement, we need to take it out tax efficiently. A lot of retirement calculators don’t talk about taxes because they don’t look at the overall plan, they’re just looking at just your investments. What we want to do is make sure that when we have the retirement calculator it’s going to take all those things into consideration, but also add in taxes. What is your bottom line going to be when you receive your income? What’s the bottom line going to be when you leave it to your beneficiaries?
Last but not least, the reason why I believe these retirement calculators that are free or that are too simple online is that they don’t come up with the unexpected occurrences, like a major market correction or a loss of a spouse where we might lose a social security check or even a pension. Maybe we have a long term care event, and we’re going to spend down a lot of our assets because we have to help take care of our significant other. A lot of these things never get factored in the retirement calculator, but when you do your own retirement plan, when you write it all down, you need to make sure you have steps covered for each one of these scenarios.
When you work with a retirement calculator make sure that it’s not too simple, it’s going to cover your social security, it will have inflation adjustments, it will cover taxes, and it can look at the unexpected occurrences. That in a nutshell will give you a good retirement calculator. From experience, I’ve never found one that works perfectly. That’s why usually it works well to partner up with a financial advisor that does utilize a really good retirement calculator to make sure it’s going to work with your own retirement plan. Until next time, we’ll see you then.
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