Common Mistakes in Using Retirement Planning Tools
Online retirement planning tools are all over the Internet. Many baby boomers use these tools to help them get back on track or to assess where they are in being prepared for retirement. I have discussed a number of those online tools here at Go To Retirement. Some are free and some are fee-based.
The Pension Research Council has studied some of the better know retirement planning tools and summarized some of the major problems.
The free planning tools tested were:
- AARP retirement planning calculator
- Fidelity Retirement Income Planner
- MetLife calculator
- T. Rowe Price Retirement Income Calculator
- U.S. Department of Labor
These are the major problems found with one or more of the tools:
1. Predicting Plan Longevity. Baby boomers often underestimate how long they will live. The consequence is that they don’t realize long their retirements will be and how long they will need their plan to provide income. (See Life Expectancy and Retirement Planning)
2. Preparing for the Effects of Inflation. While inflation is low now, that won’t be the case in the future. Most retirement planning tools make unrealistic assumptions about a constant future retirement rate or worse, they expect you to predict it. That’s why I think that at least part of your retirement portfolio needs to be protected against inflation. If you use one of the online tools, experiment with different inflation rates to understand the effect on the tool outputs. (See Inflation and Retirement Investing)
3. Planning for Payment of Medical Expenses. I agree with the Pension Research Council on this: Many retirement planning tools do not properly estimate what our expenses will be for retirement health care. There are tools for that as well and you should probably look at those first, before running a comprehensive planning tool. (See Healthcare Costs in Retirement)
4. Social Security Benefits. A big weakness in some retirement planning software is is either ignoring Social Security entirely or not allowing the user to input a personalized benefit level. This can create plan flaws because Social Security income may be a significant component of your retirement income plan. An estimate of your Social Security retirement benefit is easy to obtain. (See Social Security Retirement Benefit Estimator)
5. Defining Retirement Success. Many online retirement planning tools use their own definition of what a successful plan outcome should look like. Your definition of retirement success may be different. As just one example, you may have a specific desire to leave an inheritance for your children. (I don’t necessarily agree with that but I can understand how others might feel differently. It is important for the user of the planning tool to understand what differences may exist between their ideas for a good plan outcome and what the planning tool assumes.
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