Retirement planners and calculators (part 1 of 2)
It’s been a while since I’ve discussed the choices of retirement planners and their strengths/weaknesses. If you’re new to this blog (or if you’ve discovered this post through a search engine) then you might want to read about the problems with retirement calculators. They all have problems (no matter how well they work or how user-friendly they are) but the first step in using these tools is understanding their limits.
Before you race to the links and start plugging in numbers, consider why you’re using a retirement planner in the first place. If you’re planning a 4% withdrawal during your retirement then all you need to do is multiply your retirement spending by 25. Done. See you for the next post!
The most important reason for using a retirement calculator is to check your analysis. A good retirement planner will help you discover financial questions that you might have overlooked. Everybody’s planner starts with lifespan, expenses, assets, and liabilities. However the analysis can quickly turn to asset classes, investment returns, asset allocations, taxes, inflation rates, health insurance, long-term care insurance, life insurance, and estate planning. Your primary reason for using a retirement calculator should be to make sure that you’re not missing a factor. Of course you can also find this forceful backup by posting on discussion boards like Early-Retirement.org or Bogleheads.org.
For those of you preferring a more personal touch, you could consult a financial adviser who will help you with the analysis for a flat fee. Even if you’re taking that approach, however, you want to optimize your use of the adviser’s time by preparing yourself with the answers to their questions. They’ll probably ask you to provide all sorts of financial details at the first meeting, and they may even ask you to prepare your answers with a checklist sent to you beforehand.
A second reason for using a retirement calculator is more fun– to estimate your retirement date! Whether you use a spreadsheet or a website, you want a calculator that retains your data for tracking and changes. You want to run various “What if…?” scenarios based on spending, investment returns, asset allocation, lifespan, or other concerns.
A third reason is reassurance. Whether you’re trying to make sure you don’t miss anything, or whether you want to know exactly how many more days you’re trapped in the workplace, or even if you’re concerned about the stock market– a retirement planner should be able to help you feel better by answering your questions. You’re worried about the answers, but a good calculator will help you worry constructively by assessing the impacts and developing contingency plans. If you’re having a bad day at the office, then you want to check that you’re truly financially independent before you make any abrupt “career decisions”.
A final reason is tracking. Not all retirement planners will offer a checkup after you’ve retired, let alone mid-course guidance. I’ll point out the ones you’d like to use for (at least) that purpose, especially if you’re coping with a bear market and looking for more reassurance.
Do you need to pay money for a retirement planner? NO. Lots of free planners are “good enough” to get you through the process. If you’re concerned about a particular question, or if you’re a calculator geek who plugs numbers for entertainment, then feel free to spend a little money for the ones mentioned on this website. But there’s no need to fork over hundreds of dollars to a trained professional adviser– unless you feel that you’re truly in need of a high level of personal reassurance.
Here’s the list:
FIRECalc. This is one of the first grass-roots early-retirement calculators to be based on actual historical investment-performance data, and today it’s still the best. It grew out of a 1990s spreadsheet developed by John Greaney and Dory36 at the Motley Fool Retire Early Homepage and later improved at Greaney’s RetireEarlyHomePage website. Dory took FIRECalc even further by turning it into a website application that gained traction in 2002. Today’s FIRECalc v3.0 uses the same historical approach with more “What if?” questions. It also includes a Monte Carlo module to offer additional data runs, because 130+ years of historical data isn’t always statistically enough to support the analysis of a three-decade retirement. The software has minor glitches with spreadsheet displays and COLA adjustments, but it’s still the leading historical-performance calculator. Early-Retirement.org also maintains a FIRECalc support forum for questions and feedback.
Financial Engines was developed by William Sharpe, the Nobel prize winner who applied ground-breaking theory to stock-market analysis. Financial Engines is now a publicly-traded company with products to sell, but most of their business is directed at 401(k) custodians. If you’re an employee with a 401(k) that offers Fidelity or Vanguard or T. Rowe Price funds then you may be entitled to free use of the planner. Otherwise you’ll be asked to pay $40/quarter, with additional fees for premium services.
Even at full retail, FinancialEngines is worth the test drive of its Monte Carlo simulation. (I’d consider it an entertainment expense. But yes, I am such a calculator geek that I was one of their first users in the late 1990s and I still have my free beta-tester’s account.) It was one of the first calculators to offer the algorithm and it continues to refine the analysis. It also offers more personalized options than most calculators. Users enter their entire portfolio holdings along with information about their retirement income and expenses. This may include a desired asset allocation, liquid funds, and even planned bequests to heirs. FinancialEngines includes federal & state tax rates or allows users to enter their own assumptions. 401(k) participants also tell FinancialEngines what investment funds are available in their retirement accounts.
Once FinancialEngines has the data, it runs an analysis of the portfolio’s success. It also recommends asset allocations and even suggests specific funds. This is a good opportunity to test your volatility tolerance with other asset allocations or to see if other funds would have been worth the additional risk of loss. Sadly, FinancialEngines does not offer Thrift Savings Plan advice. In its defense, I don’t know of a retirement planner that does.
For sheer simplicity of data entry, The Motley Fool has licensed a retirement calculator from LeadFusion. You enter the data for not just your own portfolio and expenses, but also for what you expect to see in future market returns and inflation rates. In other words you get to not only provide your data but all the other performance parameters as well.
This places a lot of power in your hands, and it can lead to a number of interesting “What if?” scenarios, but TMF’s calculator doesn’t give much guidance about what numbers would be reasonable. Unless you’re an experienced (and pessimistic) investor, you should be very cautious using this tool until you’ve researched conservative values for all your parameters– especially rates of return and inflation rates. Many retirement calculators may be overestimating expected portfolio returns based on 20th century historical returns, so use more realistic projections from Research Affiliates (stocks 5-6%, bonds 2%), Vanguard founder Jack Bogle (stocks 7 – 7.5%, bonds 3%) and T. Rowe Price (balanced portfolio 7%). Inflation has been very low for the last few years, but a century of historical inflation averages around 3-3.5%. Hopefully future inflation is lower, but this conservative estimate will certainly help avoid this calculator’s “Garbage In, Garbage Out” syndrome.
Once again I’ve reached that awkward point in the post where I could either quit after the first thousand words or blather on for another couple thousand. This time I’ve given some of you plenty of number-crunching tools to play with over a holiday weekend, so I’ll stop here.
Next Thursday we’ll finish this off with one more typical mainstream planner and a few more “niche” calculators:
- “Analyze Now!”
… and one more comprehensive calculator resource.
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