Retirement News : Seniors : CALCULATING RETIREMENT

CALCULATING RETIREMENT

Date Added: 13-04-2005

They're all over the Web -- financial calculators that help figure how much you need to save for retirement.

But do they provide good advice?

Experts say that while they generally are helpful, online retirement calculators can trip up consumers.

A retirement calculator that asks how old you are and estimates how much you have to save isn't very helpful, said Conrad Ciccotello, director of personal financial planning programs at Georgia State University in Atlanta.

At the other extreme are exasperating calculators that ask endless questions.

Most people are looking for basic guidance, said Rob Nestor, a principal in the Retiree Services Group at the Vanguard Group. "They just want a ballpark, simple, easy-to-get-to answer. Am I basically on track?"

There are two key caveats with online calculators:

One, it's garbage in, garbage out.

"There are too many variables and data inputs," said Bryan Clintsman of Clintsman Financial Planning in Southlake, Texas. "The user of an online retirement calculator has to know not only the answers but also the right questions to ask."

Two, they can help consumers with a typical retirement situation, but they miss the mark for those with more specialized needs, such as the self-employed.

"If you're a middle-income or upper-middle-income individual or family and you have a standard case, the Web is a pretty reasonable resource," Ciccotello said. "If you're nonstandard, forget the Web."

Here's what it comes down to, said Ciccotello, who co-wrote a study on financial advice on the Web:

"There's all this free advice out there. Which free lunch is worth eating?"

Financial advisers often try to prod their clients into action with the observation that most people spend more time planning their vacation than their retirement.

It worked on Dave Perkins.

"That really hit home with me, because I realized that I hadn't put a whole lot of thought into my retirement," said Perkins, 59, a retired electrician in Keller, Texas, who now works part time selling home-improvement products.

As part of his new approach, he tracks his retirement goals with the help of several online retirement calculators.

"It gives you a reference point on where you are on your projected withdrawal rates, whether your investments are going to be adequate to fund your retirement," said Perkins, who has become something of an expert on calculators.

While the free online tools generally are helpful, they should be used only as a guideline and not as the last word on retirement planning.

A bad calculator, bad data from the user and bad assumptions about future returns and inflation can lead you down the wrong path.

And people in some situations shouldn't use them at all.

"The calculators aren't designed to take into account specialized situations like extended care in a nursing home," said Kevin O'Fee, managing director at New York Life Investment Management LLC in Parsippany, N.J. "Those aren't within the scope of these calculators."

Online calculators are only as good as the person using them. You have to have some idea of what your retirement needs are before inputting the data.

"If you're starting with the wrong question, the answers aren't going to be necessarily helpful," said Steve Mitchell, director of retirement marketing at Merrill Lynch in Princeton, N.J.

For example, most calculators ask you to estimate your life expectancy. With today's medical advancements and healthier lifestyles, it's very possible that you'll spend 20 years in retirement.

"It pays to overestimate your lifespan, rather than underestimate it," said Greg McBride, senior financial analyst at Bankrate.com, a consumer finance Web site. "If you overestimate your lifespan, there's a chance that your money will outlive you. If you underestimate, then you may end up living longer than your money."

Likewise, don't underestimate your expenses in retirement, although the common belief is that expenses will fall in retirement.

"Your health insurance expenses may go up because your retiree insurance may not be as good as your working insurance," Perkins points out. "You need to realize that your expenses in some areas are certainly going to be more."

Be careful about the assumptions that retirement calculators make, because they may not be realistic.

"In all of these retirement calculators, there are some return assumptions built in," said Peng Chen, chief investment officer at Ibbotson Associates in Chicago, an investment consulting and research firm.

"One should look at how much was assumed in there and was that realistic, was it too high, because return is the No. 1 determinant of portfolio performances in the future."

Some calculators might default to the long-term average stock market return of 10 percent. But many experts say that is unrealistic, at least for the next few years.

Another concern: Do the calculator's built-in returns take into account the ups and downs of the stock market?

"That reflects how the model handles the risk of the portfolio," Chen said. "If they assume returns are constant each year, then they're not taking the risks of the market into consideration.

"The constant returns show you the average outcome of the portfolio, but the market is anything but averages."

Inflation is also a major component that you must take into account because it dilutes your purchasing power, something you really can't afford in retirement.

"Calculators that ignore inflation are dangerous," said Ciccotello.

Some calculators will ask you to enter assumptions on both inflation and return, in which case you really have to be careful not to be overly optimistic.

"One of the most difficult aspects of retirement planning is knowing the numbers and trends of the many data inputs," said Clintsman.

"For example, what inflation rate are you going to use -- that of the past 70 years (3.1 percent), or of the last 35 years (4.6 percent)?

"What are you going to include for Social Security? What about health care and long-term care costs? What about the choice of taking your retirement as a lump sum or annuity?"

Just as you shouldn't put all your financial eggs in one basket, don't rely on just one calculator.

"You should use two or three of them," said Perkins, who added that he looks at "at least half a dozen" calculators.

"If they're all telling you pretty much the same thing, you're pretty much in the ballpark."

If your retirement needs are complex, the calculators don't provide the last word.

"The more complex a person's financial situation and the more unique or multiple options that somebody's considering, the more they need a financial adviser to help them look at the different possibilities and the financial impact," says Merrill Lynch's Mitchell.

"People aren't just going from a full-time working career into a full-time leisure retirement and living off their retirement assets. Most retirement involves a period of leisure and working back and forth, and that really changes the financial equation."

If you're going to a financial adviser, use a retirement calculator as a guideline and supporting data to work with your adviser.

An adviser can ask you key questions that would help you gain more insight into your retirement goals -- something that most calculators can't do.

"The typical planning tool asks, when do you expect to retire?" Mitchell says. "That's really the wrong question.

"The question should be, how do you envision your retirement?"

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