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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."

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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."

Next: " ... Traditional targets may be a little low."
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