Most online retirement calculators are overly simplistic.
They can be a great starting point. Sorted.org.nz's Retirement planner, for instance, is a terrific resource. (And better than calculators from many financial institutions *cough which can have ulterior motives cough cough*.) It allows you to input a few variables such as how much you want to spend in retirement and how long you expect to live, and it will give you an exact figure for how much you'll need to save for retirement.
This is valuable.
But when it comes to something as important as planning for your retirement, and deciding how to draw down the capital you've accumulated for retirement, it shouldn't be the end of the matter. It should be a starting point.
It's important to realise that online retirement calculators take a fairly simplistic view of retirement and make some enormous assumptions.
They assume that your retirement nest egg will reduce in an orderly fashion like this:
When your situation will probably look more like one of these lines:
Simple retirement calculators:
- Assume you'll generate a constant investment return throughout your entire retirement.
- Assume that you'll spend the same amount of money throughout your retirement.
- Assume you won't receive any possible capital injections (such as freeing up capital by rightsizing your home) or incur one-off expenditures (such as travel, car purchases, renovations, or helping children get on the property market).
- Assume that you're happy to spend your last dollar on the day you expect to die, and that you don't care about how much you leave in your estate; nor do they factor in a buffer that might give you an important sense of security during your twilight years.
Most of these assumptions won't apply to you. For example:
- You may expect to downsize (right-size) your home at some point - even if it's in the very far future.
- You may want to help out family members with a warm hand (while you're alive) rather than with a cold hand (after you've passed away), and the assistance you provide will vary considerably from year to year.
- Your retirement expenditure won't stay constant throughout your life. Most people want to spend more at the start of their retirement, and tend to spend less as they approach their eighties.
To illustrate this, I've created the following video to "peek behind the curtain" of how these calculators operate, and how you can create your own simple calculator to investigate how these scenarios might impact your retirement.
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I hope it's valuable! If you have any questions or feedback, let me know.
(If you want to run through this process with me, check out my business Fairhaven Wealth. This type of "flawcasting" exercise is a small but important part of my advice process.)