As the retirement industry has undergone a digital transformation, the online tools available to plan participants have become even more valuable. An August study by Cerulli Associates found that 86% of plan participants find savings tools and calculators on their 401(k) website very or somewhat helpful for retirement planning, up from 77% in 2020.

But like all types of data analytics, the usefulness of tools like retirement calculators depends heavily on the accuracy of the data that they use to make their projections. To take a best guess at the future, they need to make several assumptions about factors such as rates of return, inflation and the age at which the participant will retire.

That last item—retirement age—often starts with an assumption that the participant will exit the workforce at age 65, likely a vestige of decades past when that was the full retirement age for claiming Social Security benefits.

“Age 65 is a general rule of thumb that came about in 1935 [when Social Security launched] and anchors back to the retirement of previous generations,” says Jack Barry, vice president of product development, strategy and transformation at John Hancock.

Of course, fewer than 2% of the U.S, population now has a “normal retirement age” of 65, and more than 80% have a normal retirement age of 67. When it comes to retirement calculators, however, many recordkeeper retirement calculators still focus on 65 as the default retirement age.

A moving target

Americans are starting to change the way that they think about when they will retire, based on economic conditions and their own desires. In February, 30% of Americans told Nerdwallet their planned retirement age had changed in the past year, with 16% planning to retire later and 11% hoping to quit work sooner.

But the age at which people retire, of course, does not have to correspond to the date at which they start taking Social Security.

“We strongly recommend that at least the primary earner in the household delay taking Social Security until age 70,” says Wei Hu, vice president of financial research at Edelman Financial Engines, where retirement calculators use 65 as the default retirement age assumption. “There are very strong delayed retirement credits that make that the best way to maximize the household’s value of lifetime benefits from Social Security.”

Wei says that EFE uses 65 as the default in its calculators because it falls in the middle of the range of ages that most people might seriously think about retirement. For younger workers, that number may be more of a general idea, while older workers may have a more specific notion of when they will retire, and the calculators need to be able to serve both.

Jason Jagatic, head of workplace thought leadership at Fidelity, which uses a default age of 67, agrees that one of the goals of retirement plan calculators should be to lower the barrier to entry for users just starting to think about their plan.

“Oftentimes, people don’t know where to get started, or they’re intimidated by the process of getting started,” he says. “Using assumptions is just a way to streamline that: It’s a starting point to give them an informed position that they can then go and edit.”

The importance of education

As people get older and advance in their careers, it becomes more important for them to adjust their data to produce more accurate projections.

“If you anchor to the wrong number for too long, you don’t necessarily have a full view of what your retirement is going to look like, and by the time that comes to reality, it might be too late to make the adjustments that you need,” Barry says. “If participants are just taking the rule of thumb, versus taking something that’s personalized to them, they might miss out on opportunities.”

No matter on what default retirement age a calculator starts, plan sponsors and their advisers need to connect with participants to help them understand that the input is just an assumption and that they should change it, as necessary, to better reflect their personal circumstances.

“It can cause emotional distress in some people when they have to meet a certain deadline, such as retiring at 65,” says Emilio Vela, director of participant engagement at Pensionmark. “Retirement calculators are supposed to be more of a reference guide for participants, versus it being the only component they use to really map out their retirement.”

Improving engagement

In addition to making sure that participants understand the assumptions used, retirement plan calculators offer other ways for plan sponsors and their advisers to engage with participants about how it uses data to create projections.

“The plan sponsors have an opportunity to explain [to participants] what these things in the calculator actually mean,” Vela says. “So they become empowered to go through that process on their own and feel comfortable that they really understand what it is producing or generating.”

Beyond their assumptions, retirement plan calculators may offer different results to participants depending on the formula used. For example, one calculator might assume the participant converts a nest egg into an annuity, while another might use a drawdown strategy.

Aside from the assumptions, retirement plan calculators have improved at factoring in more employer-provided data, such as age or income. Retirement calculators also increasingly take a more holistic approach, allowing participants to input things like debt, spouse’s income or out-of-plan income sources.

“If you can pull in clients’ actual information on things like account balances or savings data, that goes a long way, because it gives you the most up-to-date and accurate data,” Jagatic says. “That’s one way that a plan sponsor can really help participants make the most of these tools.”

‘As realistic as possible’

Many best-in-class recordkeepers pair their calculators with education—either online or in-person—that allows plan participants to gain a better understanding of their overall retirement security.

“Any time you’re doing financial planning or retirement planning, you want it to be as realistic as possible,” says Matthew Compton, managing director of retirement solutions at New York-based Brio Benefit Consulting.

From there, plan sponsors can offer additional communications to nudge participants to make changes, such as increasing their contributions or postponing their planned retirement date, that can improve their odds of a successful retirement. Participants can make changes to the assumptions in a calculator to see an estimate of the impact such changes could have on their nest eggs.

“Oftentimes, it’s about getting people engaged and planning, and that accessibility comes from multiple different levels with a retirement calculator,” Jagatic says. “People can use it on the go, but the language and terminology is still accessible. Making it simple and providing education is key.”