Use Retirement Planning Software with Care

You can find plenty of no-cost and low-cost retirement calculators on the Web. The software helps you determine if you have saved enough money for retirement. My advice always has been that it’s best to use several programs, compare the results from the different programs, and prefer programs that let you change all or most of the variables.

A recent study from several academics backs up that advice. The researchers first developed a profile of a hypothetical couple about 10 years from retirement. Then, they developed a plan using software marketed to financial planners, MoneyGuidePro. (One of the researchers is a consultant to and investor in MoneyGuide Pro.) That software concluded there was only a 53% probability the couple’s resources would last through their retirement.

The researchers then entered the profile in 36 online retirement planning tools.

Some tools were free, while others charged modest fees. Only 11 of the online tools reached a result similar to the professional software. The other two-thirds of the tools showed the hypothetical couple had at least a 70% probability their money would last the rest of their lives. Some tools said the couple would be financially secure. The paper lists the 36 tools tested but doesn’t reveal which ones had satisfactory results.

As I’ve discussed in my books and in Retirement Watch, many retirement planning calculators limit the data that can be entered and the assumptions that can be changed. Often the goal is to keep the programs simple, partly to reduce development costs and partly to keep users from being overwhelmed and abandoning the programs. Too often, the simplicity creates unreliable results.

It is best to use a tool that lets you customize the data. The researchers in the software study identified a minimum of 20 factors the user should be able to adjust in a retirement planning program. On the members’ section of the Retirement Watch website, I’ve included an Excel spreadsheet that allows you to estimate retirement spending in detail and customize the details. You even can establish a separate inflation rate for each spending item. The spreadsheet is available free to members. Look under the “Member Extras” tab for Retirement Spending Model.

Another approach is to use more than one of the online tools. After using one, using additional tools will be faster and easier. You’ll quickly see how the results can vary considerably between the different models.