From banks to insurers to the federal government, retirement calculators are a regular feature of the financial planning landscape.
At their most basic, they use data, such as age, income and current assets, to provide recommendations for how an individual can aim to meet their retirement goals. But can these tools truly provide a reliable roadmap for employees looking to forecast their futures?
Where an employer provides a defined contribution pension or other capital accumulation plan, a retirement calculator is often part of the services offered by its record keeper.
“At least the insurance company CAP record keepers in Canada all have retirement income modelers as one component of a broader member education offering, and other record keepers may offer something similar,” says Rosalind Gilbert, associate partner in the retirement consulting practice at Aon.
At New Brunswick-based J.D. Irving Ltd., 25 to 30 per cent of staff are using the retirement calculator provided by the company’s record keeper, according to its vice-president, Riley Pye, who notes the tool offers in-depth and practical information.
“Some of the older software will tend to focus on how much money you’ll have, but it’s not necessarily telling them what it will do for their retirement,” says Pye. “Imagine if you told somebody at age 65 that they’re going to have 350 kilograms of coffee for the rest of their life. Would they be happy? I’d have to sit down and do the math. It’s the same thing here, if we just tell somebody they’ll have $300,000 at age 65.”
Desjardins Group’s retirement planning simulator is part of its offering for plan sponsors. Among plan members using its online service to manage their retirement savings, 40 per cent are actively using the simulator, says Maria-José Perea, the insurer’s director of business solutions.
To begin, the simulator is pre-filled with information from the plan sponsor, including an employee’s gross salary and group savings plan information. The employee inputs their own characteristics, such as history of contributions, planned retirement age, target retirement income, investments, level of risk in the portfolio, rate of return and any additional retirement income sources. Finally, assumptions will include government pensions, actuarial calculations and interest rates.
According to Perea, the simulator returns an accumulation value at retirement (which is broken down into different sources), the contribution rate required to hit the goal, advice to rebalance investments with levels of risk tolerance and customized recommendations across the platform.
The big picture
Even within the purely financial aspect of retirement planning, Gilbert points out assumptions embedded in online calculators may not always be appropriate for a particular individual, and employees may not understand these assumptions or calculations.
“Nobody has a crystal ball, so I don’t think you can ever say that assumptions are accurate or not. I think ‘reasonable’ is a better word to use,” she says. “Someone like us could review a number of different calculators and say this one uses reasonable assumptions and this one doesn’t, but it’s more important for the individual using the retirement calculator to understand what the assumptions are and, more importantly, how changes in those assumptions will change the retirement income estimates.”
Gilbert offers a hypothetical example of a conservative investor who accidently uses a modeler based on a more aggressive 60/40 equity-bond portfolio, and assumes future higher rates of return than would actually be likely.
Acknowledging that a retirement calculator may not incorporate everything, Pye suggests a more comprehensive financial plan will account for individual situations. “For instance, some people have mortgages while others don’t,” he says. “It gets further complicated when you dive into tax planning, such as considering if you should take your [registered pension plan] or [tax-free savings account] first, and if that will claw back your old-age security.”
To help combat these potential gaps in financial literacy, Desjardins provides members with clear explanations of the underlying assumptions, as well as educational material, says Perea. Its simulator also uses a questionnaire to determine an investor profile when calculating the rate of return on investments.
In general, when considering retirement calculators, Gilbert says the most valuable factor to look for is the ability to input income from all sources.
“Maybe you have a current plan with your employer, maybe you have some personal savings outside that, but if you just put those in, it doesn’t really give you the big picture,” she says. “It’s better if you’re also able to put in your spouse’s savings and pension, as well as their personal savings and both partners’ previous employers’ plans, among other sources of income and equity.”
A good start
When J.D. Irving switched to a target-date fund in 2016, the organization launched an 18-month initiative to encourage employees to talk about their retirement plans. It included sessions with financial advisors from the company’s record keeper and meetings clarifying aspects of the retirement calculator, including that its projections aren’t a guarantee.
Ultimately, Gilbert believes these calculators are just one part of a larger planning context. “They can help people better identify a target income to reach their retirement goals and get some gauge of whether they are on track to that goal . . . but to use some of these tools without any outside support, you need to be a fairly financially savvy person,” she says.
Indeed, retirement planning is just one aspect of overall financial wellness, and employees are increasingly looking to their employers to help support them in this area.
“Employers would see value from providing this sort of help because a lot of studies have shown that financial stress, in particular, is detrimental to people working effectively,” says Gilbert. “A lot of company programs are putting a little more focus on the financial aspect, and I think in doing so employers will have a generally happier and more effective workforce.”
Alice Chen is a Toronto-based freelance writer.