Why You Shouldn't Rely on a Retirement Calculator

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We all know we need to plan for retirement, and it's not enough to simply throw some money in your 401(k) and hope for the best. Still, actually sitting down and planning for how much it'll take to enjoy your golden years tends to trip people up.

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How much will you need for retirement? It's a simple question without a simple answer, and if you're not sure, you're not alone -- 81% of Americans say they don't know how much they should be saving for retirement. Some financial experts will toss out big numbers, saying you need at least $500,000, $1 million, or even $2 million to comfortably retire, but the truth is, it varies widely based on dozens of factors.

As you're calculating how much you'll need, one of the first things you may do is plug your numbers into a retirement calculator, and poof -- you have your answer.

Unfortunately, however, it's a little more complicated than that.

When -- and when not -- to use a retirement calculator

Retirement calculators are great in that they offer a rough estimate as to how much you'll need -- and "estimate" is the key word.

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A good retirement calculator will ask for inputs such as your current salary, the percentage of your income you plan to replace once you retire, and whether you want to include Social Security benefits in your calculations. Some will also give you the option to choose the rate of return on your investments, allowing you to plan for best-case and worst-case scenarios.

Taxes are another consideration many calculators fail to address. Depending on whether you have a 401(k), traditional IRA, or Roth IRA, you'll have to pay taxes at some point. And with a 401(k) and traditional IRA, you'll have to pay taxes on the amount you withdraw, which could cause some sticker shock if you weren't prepared for it.

Depending on which calculator you use, you can get wildly different results. For example, when inputting my own information into the Fool's calculator, I learn that I'll need to have $1,048,953 saved to retire comfortably. But when I input the same information into AARP's retirement calculator, that number is $729,802. And Charles Schwab's calculator estimates I'll need $1,202,400.

None of these numbers are necessarily right or wrong -- they just use different calculations. Charles Schwab, for instance, asks for my comfort with risk and adjusts the rate of return on my investments accordingly, whereas AARP asks nothing about risk tolerance or rate of return. The Fool's calculator allows me to adjust the inflation rate manually, but the other two calculators don't.

Also, numbers don't tell the whole story. Even with all of these calculations, technology can't predict the future. There's no telling whether the markets will crash, your health will take a turn for the worse, or some other catastrophic event occurs that eats away at your savings. They also don't consider the possibility that you may move at some point during retirement to a new city with a higher cost of living.

All of that being said, you don't have to swear off retirement calculators altogether. They're a fantastic tool to get you started if you're overwhelmed at the thought of planning for retirement and you don't know where to begin -- just take the results with a grain of salt and an open mind.

So, what should you do instead?

If you can't rely on complex financial algorithms to give you an answer, who can you trust? The short answer is that you'll never find a 100% accurate estimate as to how much you'll need during retirement.

Even if you know you're going to stay in the same city for the rest of your life, you're in great health and don't foresee any problems, and you've prepared for taxes, life can still throw you curveballs.

That doesn't mean, though, that you can't do your best to prepare. Try out multiple retirement calculators and see how the results differ. That will at least give you a general range you can shoot for as you're creating your savings goals. Always err on the side of caution, and aim to save on the higher end of the scale -- it never hurts to have too much money during retirement.

You also don't have to do everything all on your own. Although financial advisors do cost money (while the majority of online retirement calculators are free), they can offer something a calculator can't: personalized advice.

Advisors can assess your individual situation, talk about your goals and plans for the future, and give you recommendations on next steps. While they still won't be able to give you a completely accurate number, they can get you close.

Retirement calculators are wonderful tools that can help get you started when planning for retirement, but they shouldn't be the only tool you use. Determining how much you need to save is a complicated process that shouldn't be left up to a single calculation. Instead, a retirement calculator should just be one tool in your toolbox to help you prepare.

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