I was just messing with the Fidelity myPlan retirement calculator, trying to understand how it works, and realized something interesting. Here is an hypothetical situation that I gave as input:
1. Age : 30
2. Annual income: $50,000
3. Savings thus far: $0
4. Contributions per month: $1500
5. Investment style: Balanced
According to the calculator, to retire at the age of 67, I would require $2,254,000. Ok..that sounds reasonable.
If I retire at age 68, I would require $2,251,000. Again, this sounds pretty reasonable. The drop in the requirement is because the Fidelity calculator assumes an average life span to be 93 years.
As I keep increasing the retirement age beyond 67, I will be working more years (which generates more income), and the time-till-death keeps on reducing so that I progressively require lesser amount of money as I approach the age of 93. The calculator allowed the maximum retirement age of 80 with a requirement of $1,398,000. So far things are ok.
Next, I started reducing my retirement age from 67. If I retire at the age of 60, according to the calculator, I would require $2,137,000. See the image below.
Ah..ha..things suddenly became interesting. The calculator now thinks I require $114,000 less if I retire at 60 than what I would require if I retire at 67 :). Let’s mess with this thing a bit more. I pulled the scroll bar to the minimum allowed retirement age of 43. Now my retirement goal is $1,469,000 !!.
Man, I would love to retire on $1,469,000 :)…at the age of 43! Obviously, something goes wrong with the calculator when you try to stretch things a bit. It doesn’t take a lot of sense to figure out that this retirement at age 43 is just not going to happen. Also, I should point out here that my initial input of $0 current savings has nothing to do with this behavior. The myPlan calculations for “retirement goal” are independent of the current savings.
Here is one plausible explanation for the age 43 retirement numbers. The calculator assumes that, when you retire, you require enough assets to maintain 85% of your preretirement income. Now, when they calculate this preretirement income, inflation and income growth is taken into account (3.97% for this calculator). At this rate if you earn $50,000 at the age of 30, you would be earning close to $70,000 by the time you are 65 (using the simple interest formula ~ PNR/100). Obviously, 85% of the income at age 65 is much more than 85% of the income at 30. So when you tell the calculator that you will retire at age 43, it assumes that you will live the rest of your life on 85% of your income at age 43.
Another reason might be that the calculator assumes you will buy some fixed income annuity with your “retirement goal” that gives an annual return of about 6%….with which you will support your post-retirement years. There is some kind of inflation adjustment in this calculation that I don’t fully understand. I suspect this might be another reason why it shows less requirement for early retirement years.
I would really appreciate it if anyone can shine some more light on this topic.
Anyways, the point is that you should not follow calculators blindly… and yes… don’t try to retire at age 43 with $1,469,000 in hand :). I am just using the Fidelity myPlan retirement calculator as an example to convey this point; this is applicable for all other calculators.
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great post! you should never solely depend on any one calculator, but I do like the narrator and his down-to-earth-I’m-just-your-average-guy voice.
Oooh I was having fun with that too, obviously. What I didn’t like was that the assumption if you retired younger, you’d need less money. What’s up with that? I would hope that I don’t correspondingly cut my LIFEspan short just because I moved up retirement! Silly silly calculator. Yes, your explanation makes sense, Golb, I still don’t like the way that (doesn’t) work though
Wanda: thanks. ..yep I agree..one should get a second opinion, especially when it comes to custom built calculators..like this one. Btw, the never “heard” the ad (didn’t have speakers when I was messing with it). does it have a narration? or did you mean the guy in the Nationwide retirement calculator?
Msminiducky: yeah
I don’t like it that I might need upwards of 2 million for retirement. The numbers in the above post are not mine, but my actually numbers come close.
Based a few evaluations I have done, it seems the calculators are somewhat accurate for “standard” situations, but can’t account for non-standard situations - e.g. retiring under 50, 20-30 year olds interested in the progress on their retirment savings.
I haven’t looked at the Nationwide calculator yet. I will check it out this weekend.
I’m not a fan of this calc, because it doesn’t account for possible pensions. It’s a better tool than nothing at all though. It says we need around 3M for retirement. That’s a lotta scratch.
GolbGuru,
The Nationwide Calculator required me to download or upgrade software to use it. It didn’t pass my first criteria, work on whatever software I already have:-) So I won’t be evaluating it.
The $1.4 million at age 43 is a lot more than 2.1 million at age 60 due to time value of money. Using a return of 8% and rule of 72, 1.4 million at 43 will grow into more than 5 million at age 60. Did you see the shortfall at age 43? If the market performed on average, the savings will be enough for retiring at age 60. But the savings are far far short of the 1.4 million bar.
The Finance Buff: I know what you are saying. Like you said, the calculator also estimates the “your goal” on the basis of a 6% return on some kind of an annuity. I think my problem is right there…I don’t understand how “annuity” works…and as lazy as I am, I haven’t taken pains to find that out after this post :(.
But I guess if that is the logic then the calculator can be further improved (easily) by a capability of predicting the “ideal” retirement age based on the input. There must be a unique age at which you just overcome the savings shortfall and have enough for the rest of your life based on 6% return. There is some food for thought for me there.
Thanks for your input on this.
the financial calculator is just plain crap. what they are doing is doing to be unethical.
the numbers i put in:
age 33,
118k income,
$200k income
$1800 month savings
the result: i would need $5.3 million to retire at age 65, and my current savings is not going to get me there.
to meet the “goal” (whatever this nefariously calculated figure may be), I would need to save $2800/month (ie $33,600 year!).
in the future, i’ll know who not to entrust to managme my retirement income.
that’s $118k in income, $200k in savings/retirement accounts
It makes sense - to replace a $50,000 income at a 4% withdrawal rate requires $1.25million. At that rate of withdrawal the assumption is that the principal is continuing to grow to adjust for inflation. Therefore, to replace the same real buying power at 60 or 65 takes more money in nominal dollars.
moom: Yeah, I sort of came to the same conclusion…eventually. But i still think it’s a bit misleading. If you retire early, a factor of lifestyle inflation should be given some weight in the calculation. Something to the effect that if you retire at the age of 43, and your friend retires at the age of 65…how much you should be saving to have the same retirement lifestyle as your friend. That will immediately bump up the numbers…and will look more realistic.
johndude: yep, it gives unreasonable results for large numbers…sometimes it’s best not to use those calculators. Just take a pen and a paper and spend about 15 mins…and you will have your own custom numbers..I think those numbers will be much more realistic and helpful.
Johndude- For the parameters you entered a $5.3M retirement goal makes sense.
You are 33yrs old the tool assumes you will receive yearly raises which will compound over the next 32 yrs. Also the tool is displaying your results in future dollars – There is an inflation rate built in. The tool also assumes you need 85% of your pre-retirement income to retire. So considering these factors it seems to make sense to me.
IRA Poster: Yeah, I see that. Thanks for mentioning it.
Ah, thank you for publishing this - I was using the Fidelity MyPlan thingy to calculate some numbers, and it looked wonky at times. I searched a bit and found your article.
Yes, those are some good reasons for the numbers feeling wrong at times
I guess working out how much we need for retirement is pretty complicated!
Great post, I love this blog really.
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