Why so many online calculators are bogus? And where should you look instead?

Maurie Backman
The Motley Fool

As someone who writes about retirement all the time, I'm often motivated to do a personal checkup and see if I'm on track with my savings. And to that end, there's a host of free online tools available to run numbers with.

The problem? Many of them have major limitations. And they could end up causing you unnecessary stress on the road to building your nest egg.

Last week, I decided to use not one, not two, but 10 different online calculators to track my retirement savings progress. And the results were quite eye-opening.

One calculator I used told me that I'd wind up with a $5 million savings shortfall for retirement based on the data I entered. Another told me that I might have $19 million left in retirement plan in my 90s. Clearly, that's a pretty extreme range, and both scenarios are also pretty far-fetched.

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Now thankfully, there were several calculators that told me that based on my savings balance so far and the number of years I have before my estimated retirement date, I should be on track to have enough money to pay the bills down the line. But what really surprised me was not just the range of responses I got from these calculators, but also, the many pieces of key information they don't take into account.

All of the calculators I used asked me to enter my current income. But not a single calculator asked me how much of my current income I actually spend.

That's a big deal, because many of these tools estimate your retirement income needs based on your income at present. The logic is that you'll want to maintain your current standard of living to some degree, which does make sense.

But what if you earn a lot more than you spend? That should change the numbers around a lot.

I also noticed that a lot of these tools don't ask you how your retirement plan is invested. Rather, they use their own assumptions about asset allocation. But a very aggressive or very conservative IRA or 401(k) plan could render those formulas useless.

And then there's your plan for retirement itself. Some of the calculators I used -- the better ones -- asked me to estimate how much of my income I was looking to replace during retirement. But not one asked if I'm planning to work during retirement, and what my anticipated earnings might amount to. Someone who's planning to bring home, say, $30,000 a year via part-time work as a senior is apt to be in a different situation than someone not planning to work at all, even if both anticipate retiring with similar savings balances and incurring similar living expenses.

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A starting point and nothing more

While an online calculator might give you a snapshot of how well you're doing on the retirement savings front, these tools should be used as a starting point and not gospel. And you should also know that many are designed to grossly overestimate your savings needs and underestimate your income-generating potential during retirement (whether via investments or part-time work). As such, you may end up on the receiving end of dire news when your actual situation isn't as bleak as a calculator might make it out to be.

That's why you shouldn't let a projected shortfall scare you too much, nor should you automatically start celebrating and halt all 401(k) contributions when an online calculator tells you that come age 95, you might still be sitting on $19 million. (Trust me when I say I still intend to max mine out.) Instead, you should really spend some time running through these questions:

  • Am I saving roughly 15% of my income or more? That's really a good benchmark to target.
  • Am I investing aggressively enough for my age? Being too conservative could limit your savings' growth, even during retirement.
  • How much of my income do I actually spend now? If you earn $200,000 a year and live very comfortably off of $150,000, chances are, come retirement, you'll manage to get by on even less.
  • What are my actual plans for retirement?Downsizing, working, and relocating could all change your financial picture.

The further away from retirement you are, the harder it is to know if you're on track. There's nothing wrong with using an online calculator from time to time to get a sense of how you're doing. But if you want a more accurate picture of your progress and likelihood to meet your goals, sit down with a financial advisor who has more sophisticated software that accounts for the factors so many free online tools don't take into consideration.

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