I just used the “retirement calculator” on my banking website and I almost had a heart attack!
I input the information requested – my age, my current salary and what I already have saved for retirement – and with the click of a button, it tells me:
to retire at 65 with your desired income would require saving $5,719 a month
Bwahhahaahah! I need to save how much per month? $5,719?
Seriously!?
Bwahhahaahah!
To be clear, I am laughing because if I don’t, I think that I will surely cry. I don’t even make that much per month, how the hell am I supposed to save that!
And then it goes on to say that they’re “ready to help me get started”.
Really? Are they ready to help me search for $5,719 a month? Because I sure don’t see it anywhere. Maybe they will help me find a money tree. Or maybe I can ask my kids – they seem to think that I have a money tree somewhere.
So I try another calculator. It doesn’t have good news either. In fact, this one was very specific. It calculated my retirement savings goal as $1,351,151.
Holy crap!
I have some money tucked away but it’s a far cry from what this site says “my goal” is. How the heck am I going to save that kind of money? I would like to retire before I’m a hundred years old!
I think the even bigger question is – how did it come up with that number? Again, it only asked me three questions.
At this point, I’m panicking. Nothing creates panic quite the way the internet does. Am I right?
I’m Googling and Googling and Googling; praying that I will find someone to make me feel better.
And, after several hours surfing around the internet, I learned a few things that I found helpful. As always, I like to share.
First of all. Retirement calculators use algorithms (that’s math) based on assumptions. They take a few pieces of real information and then proceed to input answers to questions that are impossible to answer right now.
Questions like: my life expectancy; my expected retirement expenses; my investment return.
Long story short; they’re guessing.
Of course, you can cut down on the assumptions by giving more information. The more information you provide – the less information the calculator will have to assume.
Keep in mind though, if you’re asked to enter what you believe your investment return will be for the next 10 – 20 years (or other questions that are impossible to answer right now), you are assuming (guessing) just as much as the calculator is.
Second of all. What goes in comes out. This means that if you make a mistake on the input, the output will be incorrect also and that could mean the difference between comfortable golden years or donning a McDonalds cap at 70 years old – would you like Geritol with that?
Third of all. There is no magic number. There are just too many variables. The assumptions that the calculator is making are simple math, there is no accounting for your particular scenario.
That ridiculous million dollar number that the calculator spits out at the end of the calculations? (this is my favourite part) It’s NOT real!
It is a fictitious number created using fictitious information and acting and planning based on this fictitious projection is a real mistake.
Finally. A retirement calculator can be a valuable tool if used properly (and by a professional) but it can also be very misleading. One error on the input (the assumptions) could jeopardize your financial security.
So you may ask, as I did
if they are so inaccurate, why use a retirement calculator at all?
Well, my research tells me that the free retirement calculators on the internet are generally put there by banks and other financial institutions and they are there to scare the crap out of you and get you into their office.
And it works! It certainly got me thinking at least.
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Image courtesy of Stuart Miles at FreeDigitalPhotos.net
