Why Retirement Calculators are Dumb - The Broke Professional

Why Retirement Calculators are Dumb

I don't think Walter White needs 85% of his pre-retirement income.

I don’t think Walter White needs 85% of his pre-retirement income.

When I graduated from optometry school waaaaaaayyy back in 2009, I started to finally make some real honest to goodness money.  I figured I should learn more about this finance thing and proceeded to read almost every personal finance book at the library.

I started to follow awesome blogs like Ramit Sethi’s and Mr Money Mustache.  Being a personal finance novice, I eagerly soaked up whatever information I could.  This led me to be on both sides of the argument on many different issues.

Debt is evil!  But some debt is okay.  Increasing your income is the way to wealth!  But so is being frugal.  While some of my stances on different issues are pretty solid at this point, I’m always learning new things that affect one opinion or another.

But one thing I’ve never liked throughout my financial journey are retirement calculators.  You know, those websites where you input 5 different pieces of information and you’ll find out how much you’ll have during retirement.

I’m not sure why I’ve never liked them initially.  Maybe because retirement was so far away.  Or the fact that I thought I was done with calculators once I got out of school.  But after reading more and more on personal finance, I’ve realized that retirement calculators are downright dangerous.  That’s because they assume you will participate in lifestyle inflation!

Mo’ Money= Mo’ Problems?

I’ve talked about the dangers of lifestyle inflation a number of times on here.  Pretty much it’s when you start spending more once you start making more.  It is the killer of dreams and it’s what keeps most Americans in debt regardless what income class they are in.  Almost everyone would agree it is a bad thing.

But not retirement calculators.  I was fiddling around with my company’s 401k retirement calculator, and at my current contribution rate (maxing it out!) it said I’m on track to have a great retirement by age 60.  Great news.

Then I started playing around with some numbers.  What if I changed my contribution rate?  What if my salary changed?  I found that if I doubled my salary and kept the same contribution rate, my retirement was in danger.  What in the hell?  If I make double the money I will be worse off during retirement?

In what universe does that make sense?  In the sick universe of retirement calculators, that’s where!

The problem lies in a ridiculous “rule of thumb” that keeps popping up:

“You will need 70-85% of your pre-retirement income during retirement.”

This is not an official rule (hence rule of thumb), but it is adopted by most calculators.  The retirement calculator on CNN.com says this:  “We then assume you can live comfortably off of 85% of your pre-retirement income. So if you earn $100,000 the year you retire, we estimate you will need $85,000 during the first year of retirement.”

According to the same calculator if you work hard and end up making $200,000 per year, saving $85,000 for retirement will magically not cut it anymore.  That’s because they assume the extra money you make will be going towards new expenses and not towards things that can actually produce more wealth.

This assumption shows a lot about the mentality in this country as well as the retirement industry.  While it’s good to be conservative and assume you will need more money during retirement, assuming that your expenses during retirement will increase in step with your pre-retirement income makes no sense.


Maybe this is not a big deal.  Maybe I just got offended because a calculator told me my retirement was in danger since I’m making more money than I was before.  It does make sense to be conservative when it comes to retirement.

But what doesn’t make sense is that this rule of thumb is like gospel throughout the retirement industry.  What financial advisors and retirement specialists should be saying is that when you make more income, don’t increase your expenses!

There are so many financially positive ways you can apply your extra income.  You can pay off debt, increase your emergency fund, invest it into equities or real estate or use it to help out a family member or charity.

The idea that you will need more money during retirement just because you are making more before retirement is preposterous.  Studies show most retirees become naturally conservative compared to their working years.  And it’s also important to remember that during retirement you won’t be saving for retirement anymore!  So a huge expense is already gone.

Lifestyle inflation is what keeps most middle and upper class people in the paycheck to paycheck cycle.  It’s a type of hedonistic adaptation that is dangerous because it can keep you from fulfilling your dreams and spending time with the people that matter.  Don’t let a retirement calculator tell you otherwise!



  1. I agree that using your income as the main factor in retirement calculators makes no sense. It needs to be based on what you expect to spend. If you only lived on 60% of your income before, you will be more used to that lifestyle so why would you inflate it a bunch once you retire. They assume everyone spends everything they make. Unfortunately that is true for a lot of the population, but not all of us!

    • You’re right it is true for the majority of the population, but then again I thought financial planners and calculators were supposed to help people make better decisions with their money? People need a lot less to live on than they think. Worse comes to worse they can downsize their house and car. Problem solved!

  2. This blog highlights a really great point. I have read more and more about how ineffective retirement calculators are. As someone who models financials for a living, I will say it’s very difficult to create a retirement calculator because there are SO many variables to factor in and assumptions you have to make.

    • You’re right there are a ton of variables, especially the farther off you are from retirement. I think it;s something you need to sit down with an advisor with at some point to get the details down. What bothers me a little are these rules of thumb floating around. In some areas of finance rules of thumb are useful, but not retirement planning since everyone’s situation is unique.

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