Retirement Calculators Missing Health Care Costs, but Their Usefulness Still Adds Up

At age 50, you’re earning $50,000 a year. How much money should you be socking away to live comfortably in retirement?

Using a retirement calculator available on many websites, the answer you get varies widely. For example, on the CNN Money site, you learn that you’ll need $215,757 at retirement. But the Simple Joe calculator says you’ll require more than $1 million to live comfortably. Both calculations assume a 3 percent inflation rate, Social Security benefits of about $17,000 a year and that you expect to live on 70 percent of your income in retirement.

The reason for such stark and disturbing discrepancies is that most calculators don’t take into account the potentially high costs of health care and long-term care, according to an AARP report on 12 popular online calculators. As a result, you get a false projection of your future spending needs.

The 12 calculators examined in the report, released in December, allowed individuals to test different retirement scenarios using varying interest rates, inflation rates, mixes of stocks and bonds, life expectancies and tax rates.

Financial experts say that the report’s finding comes as no surprise.

“As part of retirement planning, people need to anticipate their spending on health and long-term care,” says Geraldine Smolka, a strategic policy adviser for AARP’s Public Policy Institute. “Since coverage generally changes after retirement, people need to be aware of how that will affect their health spending.” Although projections for out-of-pocket medical costs in retirement vary, one estimate by the Employee Benefit Research Institute put that figure at $250,000 for couples.

Most of the calculators in the AARP study appeared to ignore the increase in retiree health costs, which include more out-of-pocket fees. The report also noted that health care needs increase with age and that health care inflation is much higher than general inflation.

Of the online calculators studied, the report said that only two—the Fidelity Investments calculator (available only to Fidelity customers) and the Mind Your Finances calculator—were designed to help consumers save for health care expenses and long-term care expenses.

Despite the drawbacks, retirement calculators were found to provide a valuable service because many consumers can’t perform the complex calculations on their own, the report said. For example, users can plug in various scenarios that include anticipated benefits, pensions, inheritances, 401(k) distributions and investment income as well as expenses for a mortgage, insurance costs, even vacations, and get an idea of what they’ll need in retirement 20 years from now. Practically speaking, retirement calculators help people know in advance where they stand—whether they need to save more or work longer to reach their goals, or whether they’re well on their way to a good financial future.

Carole Fleck is a senior editor at the AARP Bulletin.