Retirement Calculator Evaluation Roundup

Over the past two months, I have evaluated four retirement calculators by Vanguard, NASD, T. Rowe Price, and A.G. Edwards. In addition, Golbguru, wrote an evaluation of the Fidelity Calculator.

Overall, all the calculators provided reasonable estimates, if one was within 5 years of retirement. However, my assessment is that all the calculators underestimated retirement needs for those over 10 years from retirement. This is because the calculator does not account for the fact that many will increase their income faster than inflation, due to promotions or job changes. In addition, Golbguru found that the Fidelity Calculator reduced one's retirement nest egg needs if one retired at 60 or under, showing another glitch in this calculator. ( I did not test for this error in the four calculators I evaluated.)

What to do?

Within 5 years from retiring. Use the calculator to get an approximate estimate of whether you have sufficient savings for retirement. Contact a financial advisor who can help you do a more detailed assessment, preferably using a Monte Carlo simulation.

More than 10 years from retiring. The calculators will provide a retirement savings number based on inflation adjustments to one's salary. Thus, if one's standard of living will be constant, the calculator provides a reasonable minimum estimate. However, whenever one's salary increases faster than inflation, it would be helpful to input the new salary numbers into a calculator.

For everybody. My opinion is that it is a worthwhile exercise to consult a good financial advisor to help one navigate the complexities of retirement, with social security changes, investment options and increasing life expectancies. Personally, I think analyses such as a Monte Carlo simulation provide good details on possible scenarios.

Also, the "best practice" recommendations for retirement are evolving and have been changing fairly quickly. For example, the old recommendation was to take social security payments as early as possible. The current recommendation is for married couples to delay taking social security payments as long as possible. This is because longer joint life expectancies have made the total payout larger for those that can wait.

For more on Reaping the Rewards, check back every Friday for a new segment.

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This is not financial or retirement advice. Please consult a professional advisor.

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