Last week I was in a class and got to witness a first class academic debate between Larry Kotlikoff, Professor of Economics at Boston University, and Francois Gadenne, Chairman and Executive Director of RIIA, the Retirement Income Industry Association (Disclosure - I am a member of RIIA.)
Larry's point was that given any set of numbers, there is only one right answer, and his software delivers it. Francois was making the point that there are many formulas that can be used to solve for what amount of saving and spending one might need in order to reach a comfortable retirement.
As the debate went on, one point Larry made stuck with me. It was about many of the free online retirement calculators and even for-fee retirement software programs used by many financial advisors. These calculators often use broad assumptions about tax rates and it can lead to wildly inaccurate calculations. His point was that if you are using software that does not accurately calculate taxes in retirement than you are committing malpractice. You are knowingly giving someone the wrong answer.
Or as he said later, "Driving in Los Angeles with a map to New York is sure to get you lost."
I agree with him - to a point. Calculators that use assumed tax rates and don't actually look at how much you have in different types of accounts (ROTH, Regular IRA, or non-retirement savings) and don't accurately calculate how much your taxes may increase when you have to take required minimum distributions, and how that may affect how much of your Social Security is taxed - well, these software programs may be giving you a wildly inaccurate estimate.
However, even if you can accurately calculate all of those things today, each year it is going to change a bit, so there is no way to ever give an absolutely perfect answer. The best we can do is guide people toward making a decision that gets them headed in a better direction.
That being said, it is hard to do that without incorporating taxes, and up until this meeting with Larry I did not realize that his free software was doing all of the tax calcs behind the scenes. Although it doesn't have pretty graphics, I am duly impressed now that I know what it is doing. It is the best free retirement calculator I have seen based on its ability to provide detailed inputs for each spouse and accurately account for taxes. Check it out at ESPlanner Basic Retirement Calculator Review.
It is based on a concept that is called consumption smoothing, which is a fancy way of saying you likely want to save today so that you can keep spending about the same inflation adjusted amount later when you are no longer working.