As a designer of retirement calculators, I’ve spent a good deal of time looking at the competition. One thing has become abundantly clear as I’ve gone through this process: some calculators are serious tools while others are useful only for providing a quick-and-dirty look at retirement plans. For the sake of evaluating and discussing retirement calculators, I believe a useful discriminator is the concept of calculator fidelity. Wikipedia’s definition of the term “fidelity” as it relates to this subject is as follows: “The degree to which a model or simulation reproduces the state and behavior of a real world object, feature or condition. Fidelity is therefore a measure of the realism of a model or simulation”.
So, tools can be categorized as High Fidelity (HF) or Low Fidelity (LF). Further, I suggest the following as the definition of an HF retirement calculator: It provides good user control over all important modeling parameters, allows profiling (i.e., the ability to specify variations over time) of income and expenses during both accumulation and distribution phases, either performs detailed tax calculations or allows profiling of effective tax rates, allows control over the amount and timing of Social Security benefits, and uses the difference between income and expenses to determine contributions to and withdrawals from savings throughout the entire modeling timeframe. Further, it provides verifiable outputs and clearly defines any assumptions not under the control of the user.
Examples of High Fidelity retirement calculators are these:
Regardless of the fidelity with which a tool attempts to model the future, there are NO tools that can accurately predict the future. Nevertheless, the Pralana family of retirement calculators is built upon the premise that fidelity matters despite the fact that we cannot accurately predict future inflation rates, market returns or life expectancy. The simplifying assumptions inherent in LF tools results in compounded calculator errors which only exaggerate the unknowns and thereby make the tool outputs useful only for rough approximations. This may be fine for a quick look to see if you’re generally on track for retirement, but HF tools are capable of providing much more refined analyses of your plans and can be highly useful in helping you evaluate alternatives. For a much more thorough examination of the differences between HF and LF tools, please take a look at the series of articles on this site entitled Retirement Calculators 101 through 403.
Pralana Consulting LLC, Plano, TX
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