If you've ever tried to determine how much you should save for retirement, you might have turned to online calculators of the type provided by banks and investment firms. Those tools could be doing you a disservice. "They're using methodology that has zero connection to what economics prescribes," says Laurence Kotlikoff, a professor of economics at Boston University.That's because most retirement-modelling tools fail to account for pension income, Old Age Security (OAS) or Canada Pension Plan (CPP) payments, taxes or even alimony. They also don't incorporate economic models such as consumption smoothing, meaning people's desire to balance their spending and saving over their lifetimes despite varying levels of income.Fortunately, there are some advanced tools that incorporate economic, actuarial and sophisticated financial-planning models. Here are three options:
Created by Kotlikoff, this calculator weighs a variety of saving and spending data. It factors into its calculations taxes, government pensions, annuities, estate plans, demographic data and more to give users better insight into how much they'll need to save. The program also models out to 100 years of age instead of average life expectancy, which is the standard for most calculators. Just remember to update it when life changes, such as marriage or a home purchase, occur.
Like ESPlanner, this tool takes into account a variety of income sources and liabilities, such as CPP and OAS, pensions, insurance premiums and more. After you plug in that data, RRIFmetic calculates an investment cash flow schedule that employs consumption smoothing. It's more focused on investments and taxes than the ESPlanner; for example, it estimates how much and when to save in registered and non-registered accounts.
Canadian Retirement Income Calculator
The federal government's online calculator is a surprisingly robust tool. It asks you to input your Registered Retirement Savings Plan and Tax-Free Savings Account details, specific CPP figures from your tax statements, and a life expectancy date you select rather than defaulting to the average. It may not be as thorough and precise in its projections as the other programs–it doesn't account for taxes, for example–but it's a good place to start.