The Secret Ingredient for your Retirement Planning Calculator

Search the internet for a retirement planning calculator and you'll find them on many retirement focussed sites.

On the face of it using these calculators for our retirement planning seems very objective and precise. Make some assumptions, plug in some numbers and out pops your complete plan.

Or does it?


What's missing is some rational, unbiased brain power.

Retirement planning is not just a simple computer generated financial model wrapped up in a neat looking summary. It's a challenging and ongoing exercise which too often is influenced by biased thinking.

The reason I say this is clear if we look at the process.

At each stage we have to make assumptions about things like investment returns, inflation and how long we expect to live.

But who knows about next week let alone 20 or 30 years from now?

To give us confidence in their advice financial planning specialists offer us a retirement planning calculator to plan our retirement.

But do they know the answers to these forecast questions any better than we do? Or is this illusion of objectivity just to make us feel better or more confident about their advice?

Potential cognitive biases in our thinking

In looking at the potential errors it's interesting that Wikipedia lists over 90 cognitive biases. Which is the term used to describe the flaws in our thinking which leads to distorted perceptions and false conclusions.

Studies have shown that, even when warned beforehand about a bias it has little impact on our ability to avoid it. Remember the old adage of garbage in, garbage out (GIGO).

Be aware of the following biases and objectively review the thinking of any assumptions behind your retirement planning calculator:

Normalcy bias

- this is the assumption is that since a disaster never occurred before that it will never occur.

It can also result in people being unable to cope with a disaster once it occurs. As people with a normalcy bias have difficulty reacting to something they have not experienced before.

Confirmation bias

- the tendency is to look for, or interpret, data in a way that confirms, rather than disproves one's beliefs. So we massage the information until it matches our preconceptions.

Wishful thinking bias

- here there is the formation of a theory and the making of decisions according to what is pleasing to imagine instead of being based on evidence.

The cumulative effect of this together with the optimism bias can lead to a euphoric conclusion or "irrational exuberance".

Optimism bias 

- creates the tendency to be over-optimistic about the outcome of planned actions. In this case there would be a tendency to estimate returns from investments too high and inflation too low.

Money illusion

- promotes the tendency to concentrate on the face, or nominal, value of money rather than its value in terms of purchasing power.

This is often used by financial institutions with their projections to create an illusion of the attractiveness of their proposal.

Positive outcome bias

- the tendency to overestimate the probability of good things happening to us. We'll have a a job, with an increasing salary till the end of our working life.

Somehow our life will be fine... won't it?

So in summary we tend to think that things will go along very much like they have before and everything will turn out fine!

Retirement planning, like any planning, is not precise 

A simple retirement planning calculator can work. But try to make your overall plan more comprehensive and complete by getting other views and asking lots of questions.

Just because we can't predict the future doesn't mean that we must ignore it. There will be events that take place that no one could ever predict.

This is the reason to tweak the plan as changes happen.

In using a retirement planning calculator you need the expertise and guidance of a financial advisor to provide expertise on the technical tax issues and the vagaries and our various retirement investment options.

However in developing your retirement scenario apply plenty of brain power... and at least you may start recognising your own biases.

Retirement today is a scary prospect for many folks. Financial, Health and Future challenges! How prepared are you?