How to Pick a Good Retirement Calculator

We’ve been talking a lot about retirement calculators lately, but how do you pick a good one? A Web search for “retirement calculator” will bring you all kinds of free, online tools. But not all of them are equally useful. Some ignore inflation while others assume an overly optimistic view that income will grow by 3 percent a year or that the rate of return on investments will be 10 percent.

I prefer calculators that let you decide all the variables. They require more effort, but then you can see for yourself how a rate of return of 6 percent, or 3 percent, would affect future retirement income. Here are other factors to look out for:

• Life expectancy. Some calculators actually ask you to guess how long you will live, as if anyone knows. Others assume a life expectancy of 85, which I think is equally foolish, given today’s longer life spans. I prefer calculators that assume a life span of at least 95.

• Replacement income. While financial advisers have long suggested a replacement income of 80 percent, that may be too low, given rising healthcare costs. A goal of replacing 100 percent of one’s preretirement income is the more conservative choice.

• Inflation. Some calculators assume either no inflation or a very low inflation rate. Given how current food prices have shot up, that may be overly optimistic. I like calculators that let you choose the rate of inflation or use a conservative estimate, such as 3 to 5 percent.

Over the weekend, I spoke with WTOP radio in Washington, D.C., about why retirement calculators can be helpful and what to look for when choosing one.

If you want to play around with one, check out the new calculator that T. Rowe Price just released. It asks a lot of detailed questions, but I think it’s worth the effort.