Cedar Rock Financial | Are Online Retirement Calculators Accurate?

This article was reviewed by Chris Singer, CFP®.

Online retirement calculators are here, there, and everywhere—but are they accurate? Do they actually help you effectively plan for retirement?

The truth is, no online retirement calculator can provide you with meaningful, specific insight that will help you effectively plan for your retirement. Period. Online calculators can provide some insight, but they’re limited to the assumptions fed into them.

No matter how logical the assumptions are, how many there are, or how mathematically sound the results seem, the outputs are limited. Too many people punch their numbers in once or twice, are happy with the result, and move on. The result is a false sense of security created from inaccurate data for the reality of their situation.

Problems arise in part because of the software, but also in part because of the user. There are specific considerations and knowledge needed to effectively plan for retirement, and when you work with a generalist, it leads to oversights. When you decide to work with a financial planner, know that just because they work in the financial industry doesn’t mean they can efficiently and effectively plan for your retirement.

So, what should you do? What are the pitfalls of online calculators you need to be aware of? How can online retirement calculators help and where do you need human help? Let’s take a look.

Tax

Online retirement calculators rarely account for tax, and if it’s included, it’s an average tax rate. Maybe the calculator asks you to input what you think the average tax rate over the 20-30 years of your retirement will be. That’s a red flag. Most people’s tax rate will vary and factors like selling a property or business will affect this. Another part of the puzzle to consider is whether or not the software takes into account different tax rates based on the type of income being received (capital gains, dividends, salary, etc.).

The margin for average rates of self-reported error here is significant, and when you compound even a small error by 20-30 years, the result is a dramatically incorrect answer that will leave you in an undesirable financial situation.

In our experience, taxes can be different each year due to the sources of income you are drawing from, and this needs to be accounted for. An online calculator won’t incorporate outside assets for taxation (like investment properties) and will not differentiate between a RIFF, TFSA, or non-registered accounts and instead simply treat them the same. This is another circumstance where even a slight error can compound and put you in a sticky financial situation you didn’t prepare for.

Another thing to consider is this: the calculator is one part of the equation. The other part is the user. Some of the most common pitfalls, like not factoring in tax, occur because the assumptions are not imputed correctly or considered, or when the results come out, the user doesn’t manually correct the numbers. Our team relies on software which does a detailed tax calculation for each year pre and post-retirement, but the big difference is that our expertise allows us to fill in all the missing pieces.

Inflation

Online retirement calculators are fed limited assumptions which is another huge pitfall of these programs. The software does not take into account inflation, and if you find one that does, the average rate is imputed, resulting in an inaccurate result once again. When attempting to determine how long your money will last, imputing an inflation rate of 2.5% versus 3% or 4% can dramatically change your plan. These costs add up quickly, and though it might seem small when you’re planning, year over year these small changes compound into significant unplanned expenses.

If you’re going to opt to use an online calculator, you need to do it at least once a year to get the most accurate data. Even then, the plan will not fully encapsulate your retirement goals and financial needs.

Timing

All tools are useful when you know their limits. While an online calculator may provide you with a rough estimate, it’s essential for your retirement planning to factor in timing. No matter how good the assumptions are, online calculators don’t take into account when to draw which income or the best time for you to start collecting.

When you retire, you have multiple sources of income and the complexity here is knowing when to start which one for your specific situation, for maximum effectiveness, and for taxation.

Types of income sources in retirement include:

Public pension
Private pension
RRSPs
Investments
Canada Pension Plan (CPP)
Old Age Security (OAS)

The more money you have, the greater the potential issues are, such as taking CPP too early.

Financial Planners

When it comes to your retirement, you want to work with a specialist. Often, major banks that don’t specialize in retirement will put together simple plans using a reputable online calculator. However, when we complete our analysis, the results are much different. After running the numbers, we’re able to intervene and effectively plan for retirement so that when you do retire, your finances don’t fall short.

Takeaways

When it comes to your retirement, online tools can serve as a loose guide, but working with a financial planner who specializes in retirement will ensure financial security in your golden years. Even when the calculators seem extensive, remember they are limited to the assumptions fed into them.

You can always book a free consultation with one of our financial advisors to discuss your retirement or ask any questions you have about retirement planning.