Can This Retirement Tool Do More Harm than Good?

Even the least Internet-savvy among us know not to trust everything we read online. But when what you’re reading comes from your retirement provider, you generally expect it to be pretty accurate. This is particularly true when the subject matter asks the all-important question, “Will I have enough to retire?”

Retirement calculators are handy tools offered by most retirement providers and many employers to help employees measure their retirement readiness. The tools are ubiquitous, easy to use, and presumably could raise a red flag if your savings strategy is falling woefully short. But a recent study from researchers at Texas Tech University and Utah Valley University—soon to be published—found that 36 of the online calculators provide what the researchers called “extremely misleading” advice in retirement planning.

Among the researchers was notable financial advisor Harold Evensky, and among the many retirement calculators reviewed are several that are very widely used. Stop me if you haven’t heard of Fidelity Investments, Vanguard Group, T. Rowe Price, the Association of American Retired Persons, or MarketWatch. Even a tool run by the Financial Industry Regulatory Authority (FINRA), which regulates member brokerage firms and exchange markets, came to some poorly calculated conclusions.

Free Isn’t Always a Bargain

Many of the calculators analyzed by Evensky and his colleagues were either free or available at a very low cost. The professors looked at the guidance provided to a hypothetical couple in their late 50s earning $50,000 each and aiming to retire at ages 65 and 63. This couple was in significant danger of not having enough money for retirement. But more than two-thirds of the retirement calculators predicted smooth sailing ahead. Some even included language along the lines of, “Congratulations, you can retire.”

While it would be folly for anyone to base their entire retirement strategy on a free-to-use calculator, the danger lies in providing a false sense of security to an investor who really should be ramping up their efforts to build a suitable nest egg. Eleven tools passed the test, but the researchers haven’t yet identified them.

Balancing Complexity with Accuracy

The challenge with tools such as retirement calculators, of course, is balancing limited attention spans with the need to be as accurate as possible. To accurately assess retirement readiness, for example, the researchers suggest that more than 20 different calculations should be factored in, including savings, investments, debt load, interest rates, future expenses, family size, longevity considerations, and even expected inheritances and future health care costs. A truly robust tool, then, might sacrifice some accuracy for usability.

There is nothing inherently wrong with that. But the key for investors, even dentists, who are generally considered “highly compensated,” is to use the retirement calculator tools for what they are—another arrow in the financial planning quiver—as opposed to the definitive assessment of your retirement readiness.