Retirement planning software can help by generating quick overviews of where we’re headed financially, but unless you know the major shortcomings of these programs, you’re likely to miss some important information that could make or break your retirement plan.
First, many retirement planning programs use return rates that are unrealistic, whether through user setting or a program default. A 2009 study of popular retirement planning software condenses the 5 primary shortcomings of these programs.
- Most retirement planning calculators with default rate settings, calculate their findings based on a rate of return that is too high. Clearly, making decisions based on inaccurate data is not the right way to go, whether for long term planning or even quick overviews.
- Many of the retirement planning software packages reviewed in the same study were found to not accurately account for taxes and inflation, not to mention administrative and investment fees, causing such programs to overestimate net returns.
- Too many of the programs underestimate life expectancy. One program specified that retirement would last 30 years, and another that retirement would last until the subject was 95. The Society of Actuaries recommends using a calculator that considers gender, age and health risks to determine your life expectancy, which 50% of us live to exceed.
- Social Security benefits are not figured in with many retirement planning applications. Without specific data such as wage fluctuations over time, it is difficult to estimate Social Security benefits, but many planning programs do not account for any benefits. Go to http://ssa.gov where you can get a benefit estimate.
- Home equity treatment is an area where retirement planning software varies greatly. If you are counting on your home investment to help cover retirement expenses, be sure to choose a program that allows you to specify whether you are willing to sell or borrow against your home to meet retirement expenses.
Retirement planning software can be a convenient way to crunch some numbers, so long as you have control over the pieces of data that matter in your situation, and that the rates are set accurately. Better yet, contact us for professional advice. With years of experience helping others plan for their retirement, we’ve got the know-how to account for every contingency. Contact us today!
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.