by Kerry Hannon

photo by Firmbee

Retirement calculators can be a great place to start roughing out your plans, but take the results with a grain of salt

Oops. Fidelity concedes that its tool is simply "educational," and the same is true of the glut of retirement calculators online, mostly free. Their beauty is they take mere minutes to complete. Their downside is that their assumptions—about how much money you'll need in retirement, how well your investments will perform, and what toll inflation will take on your nest egg—can vary widely and affect your results dramatically. Plus, they often don't consider your savings outside of retirement accounts, your pension, your real estate holdings, and even your debts.

Still, online retirement calculators have one great virtue: They get you thinking—and maybe acting. About half of workers now say they have tried to calculate how much money they'll need for a comfortable retirement, according to the Employee Benefit Research Institute, up from only 29 percent in 1996. Yet, asked how they did the calculation, a quarter admitted they guessed.

Using an online calculator beats that. "It forces people to be drenched with reality," says Dallas Salisbury, EBRI's president. For example, a calculator might tell a 48-year-old who wants to retire at 67 that he or she will need $1 million in today's dollars to do so comfortably. That usually comes as a wake-up call. The response is typically, "You've got to be kidding," Salisbury says.

A simple calculator like Fidelity's, which is available on its website, will get you started. Or, you can opt for a souped-up model like T. Rowe Price's latest retirement income calculator, which uses a "Monte Carlo" methodology, testing a thousand possible simulations to model future uncertainty, even extreme market movements.

"It pays to plan," says Annamaria Lusardi, a professor of economics at Dartmouth College and a research associate at the nonprofit National Bureau of Economic Research. "I have found that people who have taken the time to calculate how much they need to save end up having a more satisfying retirement."

Here are five tips for working with online retirement calculators:

1. Realize the figures are hypothetical. The calculators hazard what amounts to an educated guess. Their typical advice: Spend less; save more. "Take the calculations with a grain of salt," advises Judith Ward, a T. Rowe Price senior financial planner. "It's not always the answer you can bank on, but it can provide you some insight."

The expectation is that using a calculator will motivate you to consult a financial planner or at least ramp up your retirement contributions. Hence, the typical calculator's minimalist approach: If it takes too much time to complete, most people will set it aside for later, if ever.

Try more than one calculator and various what-if scenarios—changing your investment mix, retirement age, and life expectancy—and watch the numbers fluctuate. You'll sense how you can control your nest egg.

2. Plan for the worst. The current environment of investment losses and plunging real estate values may already have you postponing retirement. Many calculators use assumptions that seem rosy right now. T. Rowe Price's, for example, assumes a long-term annual return (before fees) of 10 percent for stocks and 6.5 percent for bonds. Today's markets may warrant a more sober approach. Salisbury advises using a 5 percent rate of return minus a 3 percent inflation rate, for a 2 percent real annual gain. "If it causes you to do a budget and save more, what's the worst thing that can happen? You find yourself at 90 with extra money," he says.

3. Expect to live long. If you don't put in a life expectancy, calculators often will assume you'll live to 85. But many retirees will live longer, says Jack VanDerhei, research director at EBRI. Obviously, the longer you live in retirement, the more savings you will need. EBRI's Ballpark Estimate calculator lets you enter an expected age of death. It makes sense to make it 99 or 100 to be sure you won't outlive your retirement stash.

 4. Pump up your replacement income level. It's tricky to estimate how much income you'll need in retirement, usually expressed as a percentage of your current income. Financial planners have long championed setting aside enough to generate 70 to 80 percent of preretirement income. But some advisers now think that's low. "Very few people spend less in retirement," says financial planner Marc Schindler of Pivot Point Advisors in Bellaire, Texas. "People are living longer. They have more time to spend money in retirement, and healthcare costs are rising." He advises planning to spend just above 100 percent of current gross income.

Yet Laurence Kotlikoff, an economics professor at Boston University who has developed his own tool (available at maxifiplanner.com), contends that "the calculators have so many assumptions that they are dangerous. The financial industry is interested in scaring you into thinking you won't have enough money, and then they offer to help you get there by selling you investments. It's a form of financial malpractice."

5. Watch for sales pitches. Financial services company websites are full of ads for setting up an IRA account or purchasing mutual funds. But there are few shortcuts in retirement planning. Try different calculators, and if you're ready to retool your retirement plan, start by asking friends for references of trusted advisers or consult groups like the Certified Financial Planner Board of Standards.

Above all, take control of your retirement finances. As Dartmouth's Lusardi says, "Doing nothing is simply not a good idea in this economy."

Here are a handful of online calculators to jump-start your retirement planning:

• AARP: Click on Money tab. Under the financial calculator banner, go to Retirement Nest Egg Calculator.
  
  
• The Employee Benefit Research Institute: Go to The Ballpark Estimate at choosetosave.org.   
  
  
• Fidelity Investments: Click on the Retirement & Guidance tab at the top of the page, tap on retirement planning, then scroll down to myPlan Snapshot.
  
  
• T. Rowe Price: Retirement Income Calculator.
  
  
• Charles Schwab: Retirement Calculator.

Kerry Hannon is the author of What's Next? Follow Your Passions and Find Your Dream Job.