Important things to know about retirement calculator
Retirement calculators are very useful if used properly. But if you are unsure as to how to use it, calculations can get a little confusing. There are certain rules and guidelines associated with retirement calculators that will help you to use it properly.
The calculation is loosely based on the assumption of how much money you need to retire:
All the retirement calculators need more or less, the same fundamental information to work on their logic. Information such as your retirement age, life expectancy, inflation, investment return, portfolio size and expected retirement expenses are taken into consideration. These are the most important assumptions that all the calculators must have. No exceptions can be entertained as these are needed for the calculation.
The problem occurs when most of this information is of similar quantity to forecast the future. However, that is not possible. So, it can never be predicted with enough reliability to challenge your financial future.
The industry deals with hidden assumptions by applying historical average estimates. The past implication is indicative of the future. Like, the historical average inflation rate for the country was approximately 3%, that is why most experts recommend using 3% for your future inflation.
But the problem stays on with this. Your future is not your past. What remains with you is the unpredictable future. The accurate forecasting of these variables is just impossible. Only one year ahead cannot be predicted accurately, so the fact that you will predict the project of 30-40 years is absurd.
At the same time, if you think about the life expectancy assumption, that is also baseless. Nobody can know how long they are going to live.
The industry standard solution only uses life expectancy tables and project average. This probably adjusts for personal health issues or family history. However, these are meaningless. Date with destiny cannot be fixed beforehand. This cannot be calculated statistically. To assume this is a misuse of statistics. This prediction can only be made for large groups of people like the IRS or an insurance company.