If you and your spouse are already planning for retirement, congratulate yourselves. According to the U.S. Department of Labor, a study completed in 2009 by the Employee Benefit Research Institute found that just 44 percent of Americans attempt to calculate how much money they would need for retirement. Many people use a free online retirement calculator to input financial information and estimate the amount of savings needed, but there are several problems with online retirement projections.
Incorrect Social Security Projections
A 2010 report published by the Society of Actuaries found that most online retirement projection calculators fail to include the option to select a start date for Social Security payments. This is important because it affects the amount received, and most retirees count on it for at least 33 percent of their retirement income. Additionally, the online calculators were too conservative in estimating the annual increase in payments due to the cost-of-living-adjustment (COLA), resulting in an under-estimation of the Social Security entitlement. Use the Social Security Administration's calculator for a more detailed projection.
Rate of Return Assumptions
One of the most difficult tasks of retirement planning is predicting long-term investment rate of return. Online retirement projections vary wildly from site to site in their predictions. They usually give one rate, though different types of retirement investments have different rates of return. Many online projections are based on are pre-populated calculators that can't be changed to reflect your own predictions or the different rates of return for different parts of your portfolio. They also usually don't give the option to reflect the planned changes in a portfolio, because people choose more conservative investments as they get closer to retirement.
Life Expectancy and Inflation Estimations
Knowing how much it will cost to fund your retirement is difficult when you don't know how long you will live. Online retirement projections attempt to account for this by using the average life expectancy for men and women; however, life expectancy varies greatly depending on lifestyle, health issues and genetics. Inflation is also difficult to capture in online retirement projections, due to its long-term volatility. Online retirement calculators may assign an average inflation rate or allow you to input your prediction of an average rate, but they usually don't let you input several inflation scenarios.
Housing and Spouses
Though people often consider the equity in their family home as part of their retirement plan, online retirement projections inconsistently address the cost of housing in retirement. Some assume retirees will sell and downsize, others that they will remain in the family home, and it is unusual to find a calculator that accommodates making mortgage payments in retirement. Spouses may have difficulty accurately predicting retirement costs, because the projections don't usually account for different life expectancies and the expenses of the surviving spouse.
A former financial adviser with more than a decade of experience in personal finance and small business banking, Sarita Harbour is a professional writer specializing in personal finance, small business, technology, and content marketing techniques. Her writing appears online at sites such as Yahoo! Homes and Bob Vila. Harbour holds a bachelor's degree in psychology and computer science from the University of Guelph and the Personal Financial Planning designation from the Institute of Canadian Bankers.