First, let’s get one thing straight: critics of conventional retirement savings models do not want employees to simply forget about saving for retirement. “We aren’t promoting undersaving,” says Ty Bernicke, CFP, with Bernicke & Associates Ltd., in Eau Claire, Wisconsin.

What Bernicke and several other retirement experts are promoting is a revisionist view of most current financial-planning advice, which they claim encourages oversaving. “The advice being given is incredibly bad,” says Laurence Kotlikoff, a professor of economics at Boston University. “The entire methodology is primitive. It’s akin to 14th-century medicine.”

At the heart of the debate are the calculators used to determine retirement needs. The models, says Kotlikoff, use too little information to make meaningful recommendations. Moreover, the results are complicated by the inherent conflict of interest at most financial-planning firms: under many fee structures, the more people save, the higher the firms’ income. Consequently, says Bernicke, “there is a huge vested interest in how much is saved.”

The financial-planning firms, not surprisingly, disagree. Just about every study by Fidelity shows that Americans aren’t saving enough for retirement, insists pensions Deborah Pont, spokesperson with Fidelity Investments. Fidelity’s 2007 Retirement Index, for example, indicates that the median retirement savings of American households is a measly $22,500. And even if financial institutions do have an interest in increasing saving, says Stuart Ritter, CFP, with T. Rowe Price in Baltimore, “that doesn’t mean their advice is wrong.” It’s akin to a doctor operating on a patient, he says. The doctor may be compensated for the surgery, but that doesn’t mean the patient doesn’t need it.

Still, if the calculator critics are right, companies may face a dilemma. After all, says Bernicke, companies have an ethical responsibility to provide retirement education to their employees. And this responsibility can be compromised when large investment companies, with their own agendas, assist in that education. They may advise employees to continue building their nest eggs even if they have saved enough. Conversely, if employees curtail their savings and end up without adequate funds for retirement, that could lead to other repercussions — like class-action suits or federally mandated savings plans. “Just having a plan isn’t going to be enough,” says Richard Ferri, CEO of Portfolio Solutions LLC in Troy, Michigan.

Not So Simple

The fundamental problem with most financial calculators, say critics, is that they are too simplistic. Fidelity’s myPlan Snapshot, for instance, offers a financial “snapshot” that requires users to provide their age, income, amount already saved, the amount they save each month, and their investing style. Based on this, the software computes how much they need to save and how much they’re likely to save if they maintain current habits.

If a 30-year-old making $75,000 with $50,000 already saved plugs in a $500 monthly contribution to a growth portfolio, the model calculates that he is on track to accumulate only $1.7 million on average when $3.6 million is needed. If that same investor uses Vanguard’s calculator and projects a modest 7 percent return, the model estimates that he is on track to save $1.4 million when $4.9 million is necessary. If $20,000 in annual Social Security benefits are added to the mix, the target number decreases to $3.2 million. Still, says Kotlikoff, “this is miles beyond what a middle-class household can save without starving or investing in risky assets.”

What the calculators fail to consider is actual spending patterns, say critics. Many models assume retirees will spend between 70 and 90 percent of their preretirement income, adjusted for inflation, annually. Yet, data from the U.S. Bureau of Labor Statistics’s report “Consumer Expenditures in 2005” shows that people tend to spend less as they get older (see the chart at the end of this article). Average annual expenditures for people between the ages of 45 and 54 was about $56,000. That number dropped to $39,000 for individuals between 65 and 74, and to $27,000 for those 75-plus.

In addition, the calculators don’t consider the natural ebb and flow of spending leading up to retirement. Most people save less as they’re raising a family, but that changes once day care and college expenses disappear, Kotlikoff notes. What’s needed in the models, he says, is so-called consumption smoothing, so that investors can evaluate certain life decisions and their impact on living standards. And that means introducing such variables as marital status and geography into the equations.

Typical online calculators do not use such data. But to get a more accurate picture of what is needed in retirement, such variables need to be used in Monte Carlo simulations — which randomly and repeatedly generate values for uncertain variables, says Kotlikoff. That way, employees can see how their retirement accounts change with the ups and downs of the market. For example, an employee who retires in an era of high inflation and poor capital markets would see his ability to fund retirement substantially compromised. Other models would show the range of potential outcomes compared with current living standards.

For their part, Fidelity and T. Rowe Price — both of which offer Monte Carlo versions — point out that the online calculators should be viewed as starting points, not full-fledged plans. Retirement, says Ritter, can last a long time and be affected by numerous variables, particularly health-care expenditures. What the calculators present are savings plans that are realistic, yet conservative. “You face a risk of a very negative outcome if you’re not conservative,” Ritter says.

Just Do It

Several more-dynamic calculators do exist. Palo Alto, California-based Financial Engines Inc., for example, sells a technology that models investment returns, which starts at $150. Pivot Point Advisors LLC, in Bellaire, Texas, offers a free Monte Carlo–based program on its Website that runs about 1,000 iterations of actual returns over the past 30 years to determine possible future outcomes of a portfolio. And Kotlikoff has developed his own model, ESPlanner, a software application ($149) that asks users to input data on child care, college, medical bills, vacation homes, and geography, among other factors.

Questions about the relative merits of competing products aside, the real issue is whether employees will avail themselves of any financial-planning tool at all. Despite the availability of such dynamic models, most employees take only a few minutes to calculate what they need in retirement, says David Wray, president of the Profit Sharing/401(k) Council of America. Others don’t use calculators at all. “Most employees seem to think retirement will take care of itself,” says Ed Morgan, CFO of Guaranty RV Inc., a group of dealerships based in Junction City, Oregon, which now automatically enrolls new employees in the company’s 401(k) plan, deducting 3 percent from their salary.

Very few employees, it seems, are in danger of saving too much, and to date no one has actually ever complained of having oversaved. Instead, as baby boomers rewrite the meaning of retirement, the financial-planning community is struggling to recalibrate how much it will cost. “We haven’t had a whole generation of people accumulate dollars in their 401(k) plans and live to their 90s,” says Wray. “Most of this is hypothetical.”

Karen M. Kroll is a freelance writer based in Chanhasen, Minnesota.