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Reader Responses January 9, 2017
SURVEY SAYS: Retirement Readiness Calculators
Many providers offer tools that help retirement plan participants determine whether they are on track to replace a sufficient amount of income in retirement, and some offer suggestions for how to better get on track.
Reported by Rebecca Moore
Last week, I asked NewsDash readers, “Have you used such a tool, did you believe the results or take them seriously, and how did the results make you feel?”
A vast majority (95.7%) have used a retirement readiness or retirement income projection tool, while 4.3% have not. Nearly two-thirds (64.4%) indicated they believed the results and took them seriously, but 35.6% did not.
The results made 47.7% of responding readers feel encouraged; 6.8% discouraged; and 45.4% neither encouraged nor discouraged.
Among verbatim comments, many responding readers pointed out that these types of tools don’t take into account everything and should be taken with a “grain of salt.” However, even those that doubted their accuracy indicated it is a good guideline to get participants more engaged in their retirement savings. Editor’s Choice goes to the reader who said: “There are way too many variables in a person’s life over the next 20 – 40 years to put a lot of stock in those projections. For someone who has not done a lot of planning I have seen it be a great motivational tool to show them their future life of poverty if they don’t make some changes.”
A big thank you to all who participated in the survey!Verbatim
I found the tools were both useful and encouraging. Throughout my career I have been willing to get a lower net change for a larger deposit to my 401K. Now that I am nearing retirement my sacrifice has been well worth it.
What's worrisome is that different providers' online tools have vastly different results for the same assumptions. Example, one provider says "you're saving enough" and another says "you'll fall short". It is worrisome that the average participant can't always sort that out.
They may not be 100% "accurate", but they at least give you a guideline and a "scale" to go by to see if you are continuing to improve your financial position.
The results showed that I was on target to generate reasonable retirement income. It’s difficult to put a lot of faith in it because you need to study the assumptions, then you need to evaluate the likelihood of the assumptions actually occurring (this includes those within your control - continued contributions; and those outside your control - investment returns.) But the funny thing is: it seems I have more faith in the ones that show positive results and less faith in the ones that have negative results. How irrational is that? I guess I'm human because my thoughts are just tell me what I want to hear, i.e. you can afford to retire.
The tools are nice to get an idea of what you need but are certainly nothing you should follow blindly. Personally, no matter what they say I never feel fully comfortable that I'm saving enough. I hope that is a good thing since it will keep driving me to save.
Mentally, I am ready for retirement now. However, my retirement readiness tool tells me that I am on track to retire at age 67!
I think the tool overestimated the earnings rate/potential and made it seem like I was in better shape than really am (at least in my opinion of my retirement readiness or lack thereof).
It would benefit all employees to use this type of tool! But, not all providers and/or plan sponsors encourage their use. We are working on improving that at my company.
The projection tool indicates I will have $550 per month more than I need yet it states I am 90% ready for retirement. To be honest one can never be sure what they need for retirement.
I use the income projection calculator provided by my 401(k) plan provider, and check it against an Excel calculator I build for myself.
These calculators may have some value as a wake-up call to the truly clueless, but the one used by our service provider was fundamentally flawed. It based our projected retirement income needs on a percentage of taxable wages. Because it ignored deductions (e.g., 401(k), 125, and Social Security), it overstated our retirement need. That is, I currently live on much less than my current wages because I maximize deferrals to the 401(k) plan, and I have to contribute to other benefits. There was no way to factor this into the projection. Also, the projection didn't take into account variations in the expense side at all--it was always assumed that 80% of current income will be needed in retirement. There is definitely a need for a better tool to project retirement readiness.Verbatim (cont.)
The tools I've seen, although they try to be flexible, don't model many of the scenarios I want to consider. For example; retiring from my current position, taking time off, then coming back into a part-time position for a few years. That and many other patterns I'd like to explore.
In most cases, the tools are more optimistic than the Excel spreadsheet I created when I was 39 years old (almost 20 years ago) and which I update often to track my progress. The spreadsheet projects out to December of the year in which I turn 90 years old. Assuming that at least *some* of the tools are *relatively* accurate (hedging? ME?), if I continue to execute against my 20-year-old plan, I should be in great financial shape at age 90.
We offer Financial Engines with our 401(k) plan. I understand the constraints of any type of financial model and view the results with a grain of salt. However, I still think it is a useful tool to help think about retirement planning and assist with decisions on asset allocation. I particularly like Financial Engines as it incorporates data from all of my retirement and investment accounts including those of my spouse.
Level of sophistication is improving, but this is still not a good substitute for working with a knowledgeable financial planner.
The key words here are "tool" and "track". Nothing more - nothing less. Input a limited set of variables to see a potential outcome. Then, talk to a pro. Gang, it's not rocket surgery.
Most of the tools I've seen do not accurately account for other assets you may have. And in some cases, the tool seems to be a way for the administrator to pitch their other services.
I use multiple retirement calculators. My workplace calculator (Financial Engines) says I will be getting more than 100% of my current income when I retire. My personal account (T. Rowe Price) says I can spend 15% more than my retirement income goal, and my financial adviser says I would be committing financial suicide to retire at my planned date (age 55). This suggests to me that no one has a clue if I will be OK or not.
Never have time in the office to do this and need my financial stuff at home. Also once home I don't want to look at a computer after sitting in front of one all day.
They're great for creating awareness, but they need to be reviewed with a client on a recurring basis. Otherwise, it's nothing more than a visit to a gypsy with a crystal ball.
The tools that disclose the underlying assumptions get more credence in my opinion. Those that allow you to modify them are the best.
It says I will have extra money in retirement...this is while using worse case scenarios like 1% return before and in retirement, 4% rate of inflation, and 1% salary increase per year. I didn't start my 401(k) plan until I was in my mid 30s and I'm not contributing a lot to the plan. So, I take it with a grain of salt and use it as a general guide as to what I will have when I retire.Verbatim (cont.)
I've used several retirement projection tools - all had wildly differing results. I didn't have much trust in such tools until I used a Monte Carlo simulation tool that gave me the odds of succeeding to accumulate an adequate retirement fund.
The average person doesn't know how much they'll need in retirement, so how can they say if they're on track? And most don't go into how much debt the individual has that could totally offset that accumulation. While the tools may not give the true picture, at least they may create an awareness for people to get their butts in gear and start saving. 🙂
They are interesting but I question their believability. I have used 2, one from 2 different providers. Both factored in Social Security assumptions, current assets, investment mixes and both were powered by a Monte Carlo simulation. Both came up with fairly significant differences in outcomes. I'm resigned to the fact that my retirement will be a more meager existence.
The biggest problem with these tools is that they are too inflexible in their assumptions, social security is an estimate, and the ability to take future DB accruals and different possible retirement ages into account is very limited.
There are way too many variables in a person’s life over the next 20 - 40 years to put a lot of stock in those projections. For someone who has not done a lot of planning I have seen it be a great motivational tool to show them their future life of poverty if they don't make some changes.
Projection tools should take into account an individual's actual spendable income and not be focused just on salary. If you are saving for retirement at 15% and paying Social Security that is money being withheld that is not available in current spending. If you account for that, the 80% of spendable income rule would be much more attainable for many people. Ex. $100K Salary deferring 15% and 5% being taken for Social Security. That leaves 80% spending or $80K and 80% of that is $64K or 64% of your full salary. There are other deductions we make that we won't after retirement such as HSA and charities. If think people get discouraged from the results using the current models and they are not realistic.
I generally use a tool I call "Mark", or, when he says I cannot retire yet, "Debbie Downer".
As a former retirement planner (and now a plan sponsor), most of the 401k participants I met with were not interested in gathering copious amounts of information for a finely tuned outcome. They wanted an easy way to understand where they stood in relation to retirement readiness. Even though retirement readiness tools are filled with assumptions that are sensitive to change (e.g. inflation, longevity, market returns, etc.), they provide a guidepost that far exceeds doing nothing. The vast majority of my one hour individual retirement planning meetings ended with a better understanding of current challenges and possible next steps for each individual. I too have found value in running the models periodically over the years for myself and my wife.
Although I have worked in this industry for over 30 years, present definite need trumps possible future need every year. I know I should be saving at least 15%; I save 9%. Better than many, but not really enough. Plus, by the time those tools were available, it was too late to make the kind of changes recommended and still provide a roof for my grandchildren (definite present need). It is health care needs in retirement that scare me the most...
You must be careful with these tools as they all are a little different with different assumptions. It is probably best to compare results across a number of tools. These tools are "guides" and may indicate you are on the right track or not but are definitely not guarantees.
Projection did not take into account that I was debt free.
NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Asset International or its affiliates.