A recent Google search for “retirement calculator” yielded over 471,000,000 results. That’s a LOT of information to wade through! Where do you begin??
This can be one of the most frustrating and confusing aspects of trying to come up with a solid plan for your finances. Sure, you can take the steps to get to your goals – you know how to do that. But what are the steps you should be taking?
Online calculators can be useful tools to point you in the right direction. But you need to be aware of a few key things before using an online calculator as your compass.
- If it’s sponsored, be skeptical. If an online calculator is part of a company’s website, why do you think they put it there? Is it to lead you towards their own solution or product? I’ve seen financial software that was specifically written to push a particular life insurance product, regardless of the inputs entered. I’m not saying all online calculators do this, but be aware and skeptical as a consumer. Don’t believe everything you read (or calculate). Try several different types of calculators and/or websites and compare the results.
- Is the question you are trying to answer match the question that the calculator is solving? A good key here is the name of the calculator. Are you using a “retirement income” calculator to figure out if you are saving enough? Maybe not a great match. You could find a “retirement goal” calculator instead, which might be able to provide you with a more fitting answer. BONUS: It can also be helpful to step back a moment and ask yourself, what are you actually trying to solve in the first place, and why? For example, if you calculate what your future retirement savings might be, what do you want to do with that information? This can sometimes lead to better questions, which can lead to more satisfying answers.
- Dig into the underlying assumptions of the calculator. They may or may not be appropriate for you. For example, many calculators are programmed to use an inflation rate of 2-3%. That may have been OK a decade ago, but it doesn’t seem very accurate now, does it? A good calculator should provide definitions of every input and output for you, in plain English. I like the calculators on Dinkytown.net for this reason. Also, you should be able to change the assumptions to personalize your results (like increasing that inflation rate to something a bit more accurate for today’s economy). Other assumptions to look out for are: the rate of return on investments (HINT: 10% or more is NOT a reasonable expectation); and the tax rate (where you live now and where you will live in retirement will affect whether or not you pay state and local income taxes, for example). There can be a lot to unpack here, but if you do, it all adds up to better accuracy in your results.
- Finally, remember that results can change. You are a human, not a machine. At the end of the day, life is not linear. Even if we get the question clear and all the underlying math correct, we may have to be prepared to change course at some point and recalculate.
While online calculators can provide you with some ideas and viewpoints, when in doubt, I suggest contacting a professional you can trust when you are searching for financial answers. It’s kind of like looking up your symptoms on WebMD, but realizing that you probably don’t have every condition that comes up in that online search! You’d probably ask someone you trust for some perspective on how to improve your health, right? The same can be true for improving your finances – using online information can be a good start, but to make sound decisions, the perspective of a trusted human can be invaluable, leading to true peace of mind.