Figuring your spend-down rate |
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Quite a difference. In fact, Bernicke says the couple would have had to work another seven years or reduce their initial annual draw by $12,000, putting a severe crimp in their lifestyle, to make up for what traditional planning figured to be their "shortfall."
What's wrong with over-saving?
Laurence Kotlikoff, professor of economics
at Boston University, says Bernicke's objection
is only one of a host of factors that financial
institutions routinely ignore in their online
retirement calculators. He is equally willing
to reject another industry rule of thumb,
the "replacement rate," which typically
recommends that you'll need to stockpile 75
percent to 86 percent of your final-year's
income for every year you spend in retirement.
"Any of these rules of
thumb are really rules of 'dumb,'" he
says. "These Web sites are in general
inducing people to over-save. I think the
SEC should be investigating these major companies
and their Web sites. I think it's a form of
financial malpractice."
Kotlikoff admittedly has a horse
in this race. As president of Economic Security
Planning Inc., he spent 13 years developing
his own retirement planning software, ESPlanner,
available to download for $149. ESPlanner's
approach does away with setting future spending
targets altogether, and instead focuses on
determining your highest sustainable living
standard while factoring in such life changes
as income, family composition, special expenditures,
bequests, downsizing and year-by-year actual
federal and state taxes.
In short, it thin-slices your
financial picture to calculate what Kotlikoff
says is a more realistic spending model, one
that ebbs and flows as your wants and needs
change.
Gone is that particularly vexing
rule of thumb, guesstimating your date of
death (the financial industry has traditionally
suggested you add two years to the number
of years your parent of the same sex lived;
controversy surrounds this advice like a dust
storm).
"A lot of these Web sites are focused on your life expectancy. That's completely inappropriate. It should be based on your maximum age of life," Kotlikoff says.
OK, so maybe most retirement calculators are more chainsaw than scalpel. At a time when the average American's savings rate has dropped into negative numbers, shouldn't we encourage people to err on the safe side and save more? What's wrong with over-saving anyway?
"What wrong with it is, you could die," says Kotlikoff. "You may want to party big-time from age 78 to 100, but you may die at 62. As fiduciaries for our current as well as our future selves, we have to make sure we don't squander our youth rather than our money."
Kotlikoff estimates that the
financial industry's helpful calculators not
only fudge your future needs a little; they
miss the mark by a mile. In comparing his
ESPlanner calculations with the online calculators
of three major financial institutions, he
found that Fidelity was 36.4 percent higher,
Vanguard was 53.1 percent higher and TIAA-CREF
was 78 percent higher.
"These calculators out there are incredibly primitive and dangerous," he says. "Nobody should be handing out financial advice on a casual basis, and that's what is going on systematically throughout the industry because the industry is interested in selling product, not giving advice. They're overdoing it with a lot of people." |
