There are lots of retirement calculators. Naturally, people want to know which ones to use and trust. The reviews I’ve written of free retirement calculators have been some of the most popular posts on this site. There aren’t too many side-by-side comparisons of retirement calculators using realistic scenarios, so those posts generated a lot of interest.
My intent wasn’t really to crown the “best” calculator, but simply to exercise some of the better ones in a consistent way, so that people could choose one or more that would work well for them. The main reason I targeted free calculators, is that it reduces the barrier to entry for myself and others. You can choose and use these free calculators any time — no credit card required. Also, with free calculators, it’s easy and painless to use multiple calculators to compare results — getting a second or third opinion on your retirement scenario, all still free.
But my approach in that initial article and the follow ups does beg the question: What about paid calculators? Are they any better than the free offerings? Are they worth the price? If so, when, and when not? Recently I’ve been thinking about those questions….
First, some observations on the origins of free calculators, before we move on to their paid cousins. Why are there so many of them? Where are they coming from?
Well, free calculators generally fall into two categories: those from major financial companies, and those stemming from generous individuals. Examples of the former include SmartMoney Retirement Planner and T. Rowe Price Retirement Income Calculator. Examples of the latter include the Ultimate Retirement Calculator and the Flexible Retirement Planner.
The motivation for the calculators from financial companies — brokers, banks, and publishers — is easy enough to understand. If you’re an existing customer, these companies are hoping you won’t stray afield with a competitor’s calculator. Or, if you’re a new customer, they’re hoping you’ll have a good experience, get drawn in, and sign up for some of their paid services.
The generous individuals who make calculators available are usually former engineers or financial professionals, who became interested in the retirement problem, often because they needed better answers in their own life. Occasionally these individuals may have an associated blog or book, but most are not interested in starting businesses, at least not calculator businesses, and so they make the fruits of their labors available for free to others.
How good are these free calculators? In general, the best free calculators are reliable to use, have friendly interfaces, and are good enough for approximate answers to the retirement question given relatively straightforward scenarios. But what if your scenario is not straightforward, or you want something more than an “approximate” answer? Are paid calculators the solution? Let’s talk about these calculators next….
Some Paid Calculators of Note
I haven’t made an exhaustive study of the available paid calculators, much less reviewed them in depth. But in the course of my other reviews, and reading, I have come across a number of retirement calculators for sale. Below, I list a representative handful that might have merit.
In general, these calculators are associated with respected financial professionals. I have a bit of personal experience with each of them, but not enough to provide a recommendation. This list is simply a starting point for those wanting to do their own research. And, be advised, there are probably other competitive calculators for sale, that I’m not familiar with. (If you know of one, please add a link and comment below.)
Pralana Retirement Calculator — This calculator was created by Stuart Matthews, a retired electrical engineer. It’s billed as a comprehensive life-cycle model with consumption smoothing and scenario analysis. It features detailed tax and Social Security computations, and provides assistance with defining your expenses in detail. This calculator fulfills at least some of my criteria for the perfect retirement calculator. For one thing, it offers three kinds of analysis — average return, historical, and Monte Carlo. It also computes multiple scenarios, and allows you to graphically compare the results.
ESPlanner — This comes from the company run by Laurence Kotlikoff — an accomplished economist and author who is well known for collaborations with personal finance expert Scott Burns. It prominently features “life-cycle consumption smoothing,” attempting to keep your living standard stable as other financial variables change. It is also notable for performing more detailed tax and Social Security calculations than many. Finally, it offers to compute insurance strategies, Roth conversions, and retirement spending strategies.
J&L Financial Planner — This is one of the older available calculators, having been offered since at least 2001. It has an established following among financial planners, and is the software that I began using many years ago to plan my own early retirement. It was the only program I could find at the time that could graphically model cash flow from a portfolio of assets against a very flexible set of future events. It is powerful and well-supported with, among other features, flexible modeling of withdrawals from a variety of asset classes in taxable or tax-sheltered accounts.
Otar Retirement Calculator — Jim Otar has written one of the definitive books on advanced retirement planning. The most important aspect of his calculator is that it relies exclusively on historical market data — a process he calls “aftcasting.” So there are no average return assumptions or random Monte Carlo analyses — approaches that Otar feels are fundamentally flawed. His calculator also includes interesting additional features such as an asset allocation optimizer and annuity calculator, and the ability to limit cash flow in response to market events.
Do You Get More Value By Paying for Software?
Are these paid calculators necessarily better than their free counterparts? Stuart Matthews of Pralana Consulting writes: “I strongly believe it’s possible for a calculator to provide real value well beyond what’s available in any free calculator and that anyone who can reasonably hope to retire can, in fact, afford to pay a modest price for that added value.”
Indeed “You get what you pay for” is generally a useful rule in life. But I was involved in developing and selling software for about 30 years, and I can say that the rule applies only very loosely in the software world. Unfortunately, the relationship between the cost and quality of software is not always clear.
For starters, software is often priced according to market size. That’s why fantastic cell phone apps can cost 99 cents, while buggy software for obscure engineering applications can cost tens of thousands of dollars. Second, many talented programmers are willing to give away their intellectual labor for the fun or prestige, and that drives software prices down.
Lastly, in the Internet age where software can be immediately downloaded and used by millions of users, “free” has become an essential marketing tool to grab market share, before additional paid features and services are launched. So, you can’t dismiss free software as being inherently less valuable than paid software.
And, unfortunately, paying for software does not in any way guarantee its quality. In the best cases, paying means you get a dedicated individual or company standing behind the product. But you can also pay quite a bit for antiquated software that is marginally maintained by an outsourced team far removed from the original developers. It simply isn’t true that the best software costs more money.
If you find a good retirement calculator, or any high-quality software, consider yourself fortunate. But it’s not because you are paying more or less money that the software is better. It’s better, usually, because key individuals on the software development team were passionate about design, implementation, and testing.
Is a Calculator With More Options More “Accurate”?
In general, the paid calculators listed above do feature more options. They collect more input data from users and can perform more different kinds of analyses on it. They can account for more potential variations on realty.
Here’s a simple example of that: The majority of the free calculators prompt for a single effective tax rate for the entire simulation period. But if you are currently working, earning a high salary, with an eye on frugal retirement, your tax rate will almost surely drop once you are retired. So a single effective tax rate during both your working and retired years is probably not accurate.
Also, some of the paid calculators can do much more in-depth analysis of your income taxes, Social Security, and retirement account withdrawals. But almost none of the free calculators tackle detailed tax or Social Security calculations, or concern themselves with the sequencing of retirement account withdrawals.
So, does a paid calculator with more options give you a more accurate view of your retirement? Specifically, can it outweigh or reduce the potentially huge errors caused by variables such as inflation, investment returns, and life expectancy that are simply unknowable, resulting in retirement outcomes that can vary by millions of dollars?
Stuart Matthews makes the case for the Pralana calculator this way: it “gets the ‘knowables’ right even for complex test cases so that its users can effectively investigate alternate scenarios and the sensitivities of their plan to the ‘unknowables’ without the distortion created by simplistic free retirement calculators, particularly on more complex scenarios.”
To truly evaluate whether the “unknowables” outweigh the “knowables” in any given retirement requires performing a sensitivity analysis — varying each of the input parameters independently and then recording the impact on the computed results. I’ve done this for my retirement numbers, but I’m not going to tackle a general analysis here. The results will vary depending on your individual retirement data. Gut feelings about what may or may not be important could be wrong. If you have doubts about your situation, set up a retirement model, vary the inputs across their possible ranges, and see what happens to your own results!
A more accurate calculator can guide you on tax strategies, the Social Security claiming decision, and withdrawal strategies in retirement. But variables such as tax rates and government benefits can still be overshadowed by unknowables such as investment returns, inflation rates, and life span. Why? That’s because the former affect income while the latter affect assets. And assets need to be far larger than income in retirement, with common rules of thumb recommending assets of from 20 to 33 times your income.
Based on past experience, I have my doubts about how much accuracy can ever be achieved in the retirement calculation. Here’s a non-mathematical illustration why: If you are driving from New York City to Los Angeles, then knowing how to navigate around Chicago is a necessary but insufficient step. It’s great that you know your way around Chicago in intimate detail, but it doesn’t guarantee you’ll make it that far, or to your ultimate destination on the other side of the country. In the same way, I’m not sure that having higher-fidelity analysis of portions of your retirement equation, necessarily sheds much light on the big picture.
My gut feeling is that more “accurate” software helps you investigate the knowables, but that the unknowables remain just that — unknowable. I also suspect that the benefits of greater accuracy are likely to be most helpful over relatively short time frames. “Should I do some tax-loss harvesting on this market dip?” “Should I make that Roth contribution this year?” That’s because the validity of most starting conditions breaks down as they progress further and further into the future. Yes we know what inflation is running right now. We know how the market did year to date. We know how our own health is doing today. But that knowledge degrades quickly as we try projecting it into the future.
So I see much less potential for greater accuracy in answering the big questions like, “How much do I need to retire?” or, “How long will my money last?” Because those questions are strongly influenced by the inflation rate, investment returns, and life expectancy — all unknowables. A more “accurate” calculator may be able to tell what will happen to your assets if certain scenarios take shape. But it can’t give you much information on whether those scenarios will materialize, or not.
The Virtues of Simplicity
Admittedly, my thoughts on retirement calculators are influenced by my personal approach to financial planning. After experimenting with the alternative, I prefer simplicity. Why? Because, you can spend a tremendous amount of time and energy in trying to model every nuance of the future, only to have the entire picture changed by a single unexpected life event.
It’s not that planning for the future is wrong — I do that all the time. It’s just a question of how much detail is worth gathering, and how much effort you want to invest. Wish and prognosticate as we might, the future rarely turns out the way we plan.
For example, when our son was in high school I spent hours and hours analyzing how we could provide for his college education, and still retire earlier. I researched in-state and out-of-state tuitions all across the country. I looked at a slew of job, career, and location options for each family member, factoring in moving costs and residency benefits. I set up several detailed spreadsheets that are still on my computer today. One analyzes the present value of 5 different school/location scenarios across the remaining high school and college years. Another shows a detailed budget with 30 college expense and income line items split between parents and son.
None of these options or plans ever came remotely close to materializing! What happened? The great recession hit in 2008 and I gave up on my immediate early retirement plans. Then my son won a 4-year scholarship at a college we never expected, and wound up paying most of his own expenses. We stayed put for the next 5 years and only recently relocated. In retrospect, most of my college planning effort seems wasted, other than as a way to pass the time — which perhaps was some benefit!
In the same way, some paid retirement calculators collect extensive data about your present and future life. They crunch all the numbers and produce copious output, conveying a sense of accuracy and authority. But is that for real?
On the other hand, many calculators, including most of the free ones I’ve reviewed, make major simplifying approximations about the future, modeling a cartoon version of reality. Is that wrong?
In many, if not most, situations, I think the simple calculators are adequate. Some of the time, they even provide the same answers as their more complex paid counterparts. In at least one study I know, the simple, free calculator produced results that were within 9% of a more complex model, on average. That’s good enough for most people in most stages of most retirements.
But the more refined paid calculators are still a compelling option for some, especially serious do-it-yourselfers who are comfortable around numeric models. Because, even if the retirement equation as a whole remains unknown, parts of it — such as taxation and benefit withdrawals — are knowable, and actionable.
The paid calculators mentioned above generally cost less than a few hundred dollars. That is chump change compared to the cost of a retirement, or even to the cost of a tiny retirement mistake. So if one of these calculators can reduce your taxes or optimize your retirement withdrawals, that software expense could be money well spent.
In the end, when is a more accurate retirement calculator worth the price? I think increased fidelity makes sense for implementing various financial strategies and tactics in the near term. But don’t expect a more expensive or complex calculator to be inherently better at predicting the future.