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Retirement calculators are not all created equal. And the differences between them are more than just an academic issue. Why? Because you’ll be using these tools to make one of the most important decisions of your life. If you’re approaching retirement, or want to someday, either you or an advisor will likely use a retirement calculator to answer the critical question: Do you have enough to retire in safety and comfort?

Unfortunately, even the best retirement calculators compute answers that can vary by 100% or more for the same retirement scenario. These are calculators developed and tested by leading financial experts and engineers. If they have difficulty achieving precision, what should the rest of us expect?

Fact is, coaxing realistic answers out of a retirement calculator takes knowledge and good judgment. Even with that, nobody can predict the future perfectly. But there are some steps anyone can follow to get more accurate results. These tips will help you stay out of the ditch, ensure results that are as good as possible, and improve your odds of getting useful guidance out of a retirement calculator:

1. Setting Social Security and Retirement Dates: In a traditional retirement, you quit working at 65 and begin taking Social Security. But we are no longer in a traditional working world. Retirement simply begins when you stop working: That could be early, if you’re frugal and fortunate, or it could be much later. Social Security, on the other hand, begins sometime between ages 62 and 70 — depending on your financial situation and your strategy for taking benefits. Equating these two events — retirement and Social Security — is archaic and usually incorrect. Yet a surprising number of retirement calculators do it anyway. For the most accuracy, choose a higher-fidelity calculator that can handle these events separately.

2. Including a Spouse: Not all calculators can handle distinct financial data for a spouse: separate salaries, savings, and Social Security, for example. This is OK in some cases. It’s often easy and accurate enough to combine your salaries and savings. But it can be a problem when dates are involved. If your spouse is retiring on a different schedule from you, collecting Social Security or a pension at different times, a calculator needs to handle the timing. Otherwise the results will be off, perhaps way off, especially if there is a large difference in your spouse’s age or career path. To get serious about the fidelity of your retirement calculations, you’ll need a calculator that tracks your spouse’s finances specifically. (To see which of my recommended retirement calculators have this feature, simply enter ‘spouse’ into the Search box above my calculator list.)

3. Replacing Income vs. Tracking Expenses: A number of calculators insist on modeling your retirement living expenses as a percent of your pre-retirement income. While this is OK as a very rough estimate in your accumulation stage, it doesn’t cut it for those nearing or in retirement, especially early retirement. In the latter cases, you don’t even have an income. Some calculators adapt, and others simply can’t handle these situations. Fact is, income and expenses are not necessarily related for many people, especially diligent savers and early retirees. The best way for you to know your expenses is to actually track them yourself. The best way for a calculator to know your expenses is for you to enter them explicitly. If your lifestyle is unique in any way, then the one-size-fits-all or income-based expense estimates used by some lower-fidelity calculators are likely to be wildly inaccurate.

4. Making Inflation Assumptions: Many calculators incorporate a built-in rate of inflation, usually somewhere in the range of 2.5% to 4.0%. But some calculators don’t document their inflation assumption very well. You need to know. Because your point of view could be different. You might think that inflation will match the historical average going forward, or that it will be somewhat or much higher, given the United States’ debt burden. Either way, a retirement calculator is setting itself up for obsolescence by fixing that value, and not letting you change it. For a complete picture, you should be able to vary the rate of inflation and investigate alternative scenarios as part of your retirement analysis.

5. Inflating vs. Reducing Spending as You Age: The typical retirement calculator automatically and mindlessly increases your retirement expenses every year by your specified rate of inflation. That sounds reasonable, at first glance. Yet my experience and that of other retirees demonstrates that your personal rate of inflation is only distantly related to the government’s official inflation rate. Research shows that most people’s expenses decline as they age. Even with higher health-care expenses, you simply aren’t able to consume the same resources at 80 that you did at 60. Though your lifestyle could always be an outlier, in reality, most retirees are going to see a reduction in their living expenses over the years. The best calculators can account for this, or at least give you options to model it.

6. Choosing Investment Returns: More perhaps than for any other parameter, you need flexibility in setting stock and bond market investment returns. Nobody knows what these are going to be in the future. Many experts feel that even historical averages going back 100 years or more are not a sound guideline. Helping you understand the range of return possibilities should be one of the primary functions of a good retirement calculator. And it’s best if a calculator can offer you a diversity of opinions. You don’t want to put all your money on one horse. Ideally, you should be able to run simulations using each of the three main approaches for modeling returns: average, historical, and Monte Carlo. Then, compare the results. Even within each of these models, you’ll want to vary inputs. When using average returns, for example, do it using both the optimistic long-term historical averages, plus the more pessimistic numbers suggested by experts based on current market conditions.

7. Including Investment Expenses: If you are a low-cost, passive index investor enjoying razor-thin expense ratios on your portfolio in the sub 0.2% range, you might get away with ignoring investment expenses in your calculations. But if you employ a financial advisor, trade positions often, or use actively managed funds, you’d better account for investment expenses. They can consume a truly astounding portion of your wealth over the long haul. In one real-world simulation I performed that incorporated a 1.4% expense ratio over 30 years, the financial manager walked away with nearly 25% of the investor’s hard-earned money over time! Lesson learned: high expenses matter. Ignore them at your own peril. And, if a calculator doesn’t offer specific input fields for tracking investment expenses, then you’ll need to subtract them before entering market returns.

8. Selecting Tax Rates: I occasionally hear it said that taxes are the most important financial issue in retirement. In my experience as a middle-income retiree, that’s just not correct. Yet taxes are still important, and the higher your income, the more important. Even for those with modest income in retirement, substantially higher incomes during the working years require special consideration. That’s why, if you’re still working, a calculator needs to offer both pre- and post- retirement tax rates. Also, calculators need to distinguish between effective and marginal rates. Your effective tax rate is your total tax paid divided by all of your income. Your marginal rate is the amount of tax you pay on your last dollar of income. That is a function of your tax bracket, and is nearly always much higher than your effective rate. The vast majority of calculators use an effective rate, but many don’t document or explain that fact very well. And you won’t know your effective rate unless you, or your tax software, compute it based on a recent tax return or realistic retirement scenario. If you mistakenly enter a marginal rate into a retirement calculator, you will grossly overestimate your tax liability!

9. Withdrawing Among Multiple Accounts: If you’re concerned about taxes in retirement, then you also need a retirement calculator that can manage your wealth in multiple accounts corresponding to the three possible tax treatments: taxable, tax-free, and tax-deferred. (For example, at a minimum, higher-fidelity calculators will offer conventional brokerage accounts, Roth IRAs, and Traditional IRAs.) Each of these accounts has different tax consequences as money flows in, grows over time, and flows out. If a calculator offers anything less than these three types of accounts, it won’t be able to accurately model your tax liability over the years. A good calculator will model each type of account correctly, and will also help you optimize the sequence of your retirement withdrawals, to minimize your taxes.

10. Working in Retirement: Calculators that assume a traditional retirement scenario where you quit working at age 65, take Social Security right away, then head out to play golf for the rest of your days, simply can’t handle modern retirements. For starters, whether by choice or not, many of us retire earlier. And then many of us work part-time or in new, ‘encore’ careers. So, often we do have some work-related income in retirement. For some of us, that’s an essential part of the plan. For others it’s an unintended side effect of a beneficial hobby. Either way, a calculator that can’t handle some notion of post-retirement “work,” is just plain out-of-step with reality. Without the ability to account for post-retirement income, a calculator will have you working longer at your main career, limiting options for maximizing your life.

For all their sophistication, retirement calculators still face an impossible job — predicting the future. So how do you improve the results when you enter your personal data into a retirement tool and click ‘Calculate’? To get the best picture or model of your retirement, choose the best retirement calculator for you. Then apply the ten tips above to make sure the answers it computes are as accurate as possible. By becoming knowledgeable and using the best available retirement calculators prudently, you can get useful guidance on your financial moves today. And that bodes well for whatever your future may bring….

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