HapiMoney

MarketWatch just came out with an interesting article analyzing twelve different retirement calculators (courtesy of the Society of Actuaries) and came to the conclusion that they all, in short, sucked. Here are the reasons they listed as the short comings:

Longevity- In other words, how long will you live. Average age is now about 78 years, but most calculators expect you to live shorter- which kind of blows if you run out of money by the time you are 75. This is why you should plan to be living off the interest from Fixed Income- the amount you will need to save will be greater, but you nearly eliminate longevity risk.

Unexpected events and risks- or the odds that someone nearing retirement might lose their job in a huge recession at the same time the market crashes, wiping out their investment value. In summary, this is an asset allocation problem, and there is absolutely no reason that someone about to retire should have a majority of their assets in high risk assets like stocks.  Truth be told though, nobody can forecast unexpected events…hence the name.

Housing: From the article, “There is inconsistent treatment of housing as an asset for use in financing retirement. Some programs allow users to specify whether they are willing to sell their home to meet retirement expenses.” Here’s a golden rule of thumb, and never violate this: Never ever ever ever ever treat your home as an investment. It’s not. If your home sky rockets in value, and you decide to sell it, you still have to live somewhere, so unless you seriously downgrade, you are going to be paying a similar amount for a similar home. I can’t think of many people who will willingly downgrade their standard of living.

Social Security: “Software programs inadequately estimated the level of Social Security benefits users are entitled to, and did not direct consumers to the Social Security Administration Web site to obtain an accurate benefit estimate at no charge.” If you are age 55 or above, this might be a true statement. If you are below this age, you should under no circumstance expect Social Security to be around by the time you retire. Hope for it, but don’t plan for it. In my book, the retirement calculators are doing the right thing.

Annuities: “Software programs usually did not evaluate the possibility of annuitization — converting assets into lifetime income annuities — as an option to reduce risk. There was also a lack of consideration of different options for timing of payouts.” In other words, this is an asset allocation problem – similar to the problems covered by Longevity Risk and Unexpected Risks. Calculators don’t expect you to have saved enough in order to put all of your money into fixed income.

I’ll get into asset allocation in a future article- it’s part science, part rule of thumb. Basically be aggressive when you are young and pull back the reigns when you are older.