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Retirement calculators may not add up

Have you saved enough? These tools give an incomplete answer.

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The next time a calculator tells you that you're on track for a timely retirement, take those results with a heaping spoonful of salt.

A recent analysis of a dozen free retirement planning calculators from different financial services firms found wildly varying projections on how much income you'll need once you've stopped working.

Corporate Insight, a New York-based research and consulting firm, drafted a hypothetical profile of Art Vandelay (apologies to Seinfeld), a 40-year-old architect who is single, earns a $100,000 salary and has saved $100,000 in his 401(k) savings plan. Corporate Insight analyzes industry trends and customer behaviors for financial services companies.

Based on the data and other inputs, the calculators gave a wide range of monthly retirement income projections, from $6,013 to $3,772.

The magnitude of the savings shortfall also varied wildly. For example, the Retirement Wellness Planner from Principal Financial estimated that the saver needed an additional $4,597 per month to meet expenses, while the TIAA Retirement Advisor predicted a $1,120 income gap.

"Nothing is more dangerous than false confidence," said Andrew Way, a senior analyst at Corporate Insight. "This [output] should give you an idea of where you are, but don't take it as 100 percent set in stone."

What's behind the variation

Corporate Insight chose six calculators from traditional 401(k) plan record keepers and six from nonrecord keeping companies to determine whether they shared any similarities.

Though the Vandelay profile included information on expected investment returns, inflation and income tax rates, not all of the calculators accommodated that level of detail.

Instead, those calculators would use their own varying assumptions in place of some of the input, which resulted in large swings for income projections.

The assumptions with the most influence on predicted income in retirement are taxes, inflation rates, salary growth, Social Security benefits, investment returns and ages for the present, at retirement and at life expectancy.

Vandelay's profile called for an annual expected rate of return of 7 percent during his working years. Once in retirement, returns were predicted to be 4 percent, reflecting a move toward less investment risk.

However, some of the calculators used their own assumptions for investment returns, resulting in predicted returns that were overly optimistic. The Capital One Retire MyWay calculator assumed returns of 7.35 percent before and after retirement. The Principal, meanwhile, also assumed 7 percent returns in Vandelay's later years.

Don't forget: Taxes will continue to take a bite out of your income, even once you've stopped working. Corporate Insight's hypothetical investor lives in Monroe, New York, and he can expect a 28 percent federal income tax rate, a 6.65 percent state levy on income and a 15 percent federal tax on investments.

Betterment's Retirement Savings and TIAA Retirement Advisor calculators were the only two programs to consider taxes. They predicted monthly income to be $3,791 and $3,772, respectively, according to the report.

The calculators also have their own approaches toward income replacement ratios, salary growth, inflation rates and taxes.

For instance, The Principal had an 85 percent income replacement goal. MetLife, meanwhile, assumed a 60 percent income replacement goal and an inflation-adjusted salary of $128,250 at retirement. MetLife spokesman Al Killeffer said the company no longer promotes this calculator on its site.

By comparison, Vandelay's 85 percent income-replacement rate was not sustainable, according to AARP's calculator. AARP, a large Washington-based nonprofit that advocates for older Americans, wasn't part of the study.

Representatives of the companies whose calculators were in the study described their tools as free guides for investors who want to gauge their savings progress.

"Retirement income calculators are a great way to get investors engaged in the retirement planning process," said Judith Ward, a senior financial planner at T. Rowe Price. "But it's important to understand that these tools have limitations and should not be used in isolation."

A good starting point

Savers love running their results and assumptions on multiple sites, but planners warned that these tools merely offer guidelines.

"Investment returns tend to be rosier with online calculators, and they don't adjust for downshifting risk as you approach retirement," said Shon Anderson, chief wealth strategist at Anderson Financial Strategies in Dayton, Ohio.

Calculators often fail to consider Social Security strategies, too. Remember that your Social Security benefit increases by 8 percent for each year you defer claiming after full retirement age, up until your 70th birthday. This can have a huge impact on your cash flow.

"These [calculators] are a good starting point, but they're not a replacement for a financial planner," said Maria Bruno, senior investment strategist at Vanguard.

"Take these tools with a grain of salt: They're interactive and simplistic," she said. "They start that dialogue with your planner."