One of the crucial steps of retirement planning involves creating a corpus to meet the post-retirement expenses. Knowing how much money you will need to maintain your lifestyle and live a financially independent life is vital. You must carefully consider your expenses (starting a new venture, pursuing a hobby, taking a dream vacation) and expected income (returns from investment, pension, etc.) to calculate the exact amount.
Today estimating the required retirement corpus has become a lot easier with the online retirement planning calculator. You must enter a few details current age, retirement age, total monthly expenses, and the tool computes the amount you will need for post-retirement expenses.
But is this calculated amount reliable? Even though the online retirement planning calculator is easy to use and is a convenient way to calculate the retirement funds. It may not be the most reliable way, as the tool has certain limitations. This can make your retirement planning go drastically wrong.
Here are a few reasons why online retirement planning calculators are not reliable.
Negative returns
The online retirement planning calculators consider flat rate of return, which is based on a previous average or the rate mentioned by user. While it estimates the required corpus for the post-retirement period, it doesn’t consider the variations in the rate of return. Although, it warns that your portfolio is bound to suffer the down market at some point time. For example, a bear market can make your portfolio suffer a loss of more than 50%.
For example, if your portfolio suffers bear market in the early years of savings, you get a substantial time to compensate for the losses caused. On the other hand, if your portfolio faces bear market at the time of retirement, it will have a far-fetched impact and reduce the amount that you can withdraw throughout.
Variations in calculators
If you search for online calculators, many sites allow you to calculate your post-retirement corpus. As you try different sites, you will know, not all calculators provide the same estimate. A few calculators are better and more accurate than others. It is usually, the more inputs the calculator asks, the better is the accuracy.
Assumptions based process
The information that you provide to the online calculator is purely based on assumptions. Facts like how long you are going to live, how much money will you spend every year in your retirement can’t be estimated accurately. Hence the basic data that you provide for calculating the retirement corpus can vary at any point. The online calculator takes into account inflation and rate of returns, although it is just an estimation and even a slight variation can affect your retirement planning.
Despite having these limitations, you cannot deny the importance of using the online retirement planning calculator. As discussed earlier, the process is based on your inputs, so try to be as accurate as you can while proving the information.