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This story originally appeared on MarketBeat
I was thinking of the retirement calculators that pop up automatically when I check my retirement account balances. In my case, I always get a message that says, "You are XX% on track with your retirement goals."
If you look at an online calculator you can use it, but keep in mind that a retirement calculator could miss the boat for a number of reasons.
This is how pension calculators work
How exactly do pension calculators work? Always remember that a retirement calculator works as a computerized algorithm. It estimates the future growth and spending of your investment based on your inputs into your computer. You enter your expected retirement age, your current savings, your current investment returns, and more. The pension calculator calculates your expected pension return based on your current interest rate and inflation, among other things.
Some computers require more complex information and other computers make assumptions about certain data.
Check out these reasons why calculators might not be telling the whole truth.
Reason 1: You may not consider fees.
When you check out an old retirement account online, it comes up with a number that says, "You will have $ 1.6 million when you retire. But what about the fees involved?
Check out some fees that you are likely to pay over the years, whether you opt for a retirement account or a general investment account:
401 (k) fees: These fees are passed on to you as a plan participant by your employer.
Broker Account Fees: Brokerage account fees include fees for maintaining an account, research fees for trading strategies for the brokerage business, and access to trading platforms.
Commissions: Your broker charges you commissions when you buy or sell certain investments.
Expense ratios: Many funds charge annual fees as a percentage of your investment in the fund.
Load credit: Some mutual funds charge a fee that is paid to the broker or seller who sold the fund.
Administration fees: Management fees are a percentage of the assets under management that you pay to your financial advisor or robo-advisor.
These fees can really add up over time. For example, let's say you invest $ 100,000 and the account will earn 6% per year for the next 25 years. Let's say the world is perfect and you don't owe any fees. You would end up over $ 400,000.
Now let's translate this scenario into the real world where you are paying the actual fees. Let's say you pay 2% per year of total fees as above. After 25 years, you'd only have around $ 250,000.
If you are investing in a traditional 401 (k), you will need to add the distribution to your taxable income for the year as well. It is taxed at your normal income tax rate. For example, no matter what tax bracket you are in, your withdrawals will take a hit. For example, let's say you are in the 28% tax bracket. You only get 72% of the money you invest after the IRS collects its amount.
Most retirement calculators cannot calculate the full range of fees you will have to pay for all of these different scenarios.
Reason 2: They are based on many variables – but not human variables.
A retirement calculator doesn't know how long you will live, how much you will need in retirement, and how much you will spend in total. Sure, an annuity calculator estimates inflation and returns.
However, it cannot calculate when you will borrow $ 25,000 from your retirement account after 20 years of your career. It cannot examine your risk tolerance or the times when you change your 401 (k) monthly contribution because you will feel a bit of a bind during the month.
Depending on its sophistication, a retirement calculator may be able to calculate a lot of details, but most won't go into as much detail as, for example, withdrawing money from your account during a certain period of time.
Reason 3: They are based on a flat rate of return.
Annuity calculators can only use a flat rate return that you specify. However, how can you know all the details about the rate of return in any given year, let alone 10 or 20 years?
Your portfolio is likely to hit the market bottom over the years, but of course an annuity calculator doesn't take bear markets into account. Repeated negative returns can affect your overall portfolio.
Reason 4: You can overestimate or underestimate your needs.
Think about how much Social Security will go into your retirement. Will your spouse continue to work part-time while you retire?
Don't go crazy if the retirement calculator says, "You have a shortfall of $ 500,000," without considering every aspect of your personal financial situation. If you don't want to add in all the calculations, a typical retirement calculator might overestimate how much you should be saving.
You should know how your individual retirement accounts take into account your taxes, income, and skill limits to help put together your complete financial plan.
Bottom line: Without considering all the variables (again, the human variables), you could get bad advice from an annuity calculator (of all things!) On what to do with your pension savings amount. You may want to consider meeting with a financial advisor to align your goals accordingly.
Should You Use a Retirement Calculator?
Yes, you should use a retirement calculator as it will give you a nice estimate. Remember, however, that some algorithm doesn't know you – how much you love gardening, taking vacations, or spending money on your kids. It doesn't know how long you will live and how much money you will need for 20 years or more.
Get a retirement calculator for what it is: an estimate and a good starting point. However, if your retirement calculator says you only end up with $ 200,000 in savings, you probably want to take it a step further and possibly call a financial advisor. A financial advisor can add a dose of personalization and detail to your individual retirement situation and plan. A professional financial planner can advise you based on your specific goals.
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