Clark Howard

Can You Trust Retirement Calculators?

The premise of a retirement calculator is fascinating.

Based on my income, savings rate and assets today, when will I be able to comfortably retire? And how much money do I need if I want to retire earlier?

Plug in a few variables, move a few numbers around and boom! The retirement calculator will let you know whether you're on track or at risk based on your current trajectory.

But how trustworthy are these calculators? If they’re attached to an investment company, are they overly conservative to encourage excess investments (and pad their own profits)? And can you trust one of these calculators to be a sort of financial North Star?

That's what a listener of the Clark Howard Podcast recently asked.

Does Clark Think Retirement Calculators Are Trustworthy?

Can I trust the retirement calculators I find on the internet? That's what a Clark listener wanted to know on the Feb. 21 podcast episode.

Gerard in North Carolina asked: "Is there a site or retirement calculator you'd recommend? The Fidelity site has one but is not comprehensive and I suspect will always say 'not enough, invest more with us!' Am I too cynical?"

Gerard has a point. I ran a recent Google search for a retirement calculator. One of the top results set the life expectancy at 95 years old and my investment rate of return at 6%.

Of course, the typical person will take less risk the closer they get to retirement. But at 36 years old, I’d like to think I can average better than a 6% return between now and 65. The calculator also said I will need more than $7.3 million to be able to retire.

However, to a degree, a conservative calculation may encourage better financial behavior.

“You are not being cynical. You are right that in the financial services industry, there’s a big bias toward getting you to overinvest. Because that’s how they make their money — by having your money invested with them,” Clark says.

“It’s not as much of a problem as you might think, though. Because human behavior being what it is, people tend to significantly underinvest the money they need for their long-term future.”

Try Combining the Results of Several Free Calculators

Most retirement calculators are based on a single organization that popularized them, Clark says.

They typically add some sort of wrinkle that’s unique to them. But the settings and variables aren’t all that different. Especially if you start manually adjusting them to match your life or to tinker out of curiosity.

Many of these calculators are free.

The calculators are often only as good as the inputs you give them, and how accurate they turn out to be. But they can help inform you in a general sense. Especially if you compare several of them.

“I’d say if you try three or four of these, you’ll have enough information to have a real sense of where you need to go with your money by blending the results they have,” Clark says.

Why Retirement Calculators Are Conservative

Let’s return to the idea that retirement calculators can seem overly conservative.

Ideally, you have enough money when you retire that you can survive some sort of Black Swan event.

The most common, which we experienced in 2022, is when the stock market endures a major decline just as you’re entering retirement. This can be particularly devastating because it devalues your shares just as you’re needing to draw down your funds.

That leaves you much less money in your 80s and potentially your 90s than you would otherwise enjoy.

“[These retirement calculators] take into account the ‘what ifs’ and probabilities that at some point on your ride, and especially if it’s close to when you’re retiring, the risk that your money will be devastated by a decline or a long-standing bear market,” Clark says.

Just know, it is a meaningful risk long term that you face when you’re within the five years leading up to retirement if the market does cave in that last cycle of your working life.”

Final Thoughts

Retirement calculators are entertaining. But there are so many hard-to-predict variables that affect how much money you need in retirement (your health and the market performance in the years nearest to your retirement, to name a few).

You can get a decent idea of your current retirement trajectory if you compare the results of three or four retirement calculators. But if you have enough assets and financial complexity, working with a fee-only fiduciary to construct a true financial plan is going to get you a better actionable plan for your life.

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