From the category archives:

retirement

Fidelity myPlan Retirement Calculator: Numbers Can Be Tricky

by golbguru on December 11, 2006

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.

fidelity67

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.

fidelity60

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 !!.

fidelity43

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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Do Worry About Retirement But Beware Of Overkill !

by golbguru on October 17, 2006

Sometimes I think that people have started worrying too much about retirement and are loosing their sleep and happiness over it. It is one thing to be thorough and far-sighted with regards to your financial planning for post-retirement years, but there is this other thing that is called an “overkill”. Answers.com defines the word as “An excess of what is necessary or appropriate for a particular end”.

Before you set some unrealistic goals for yourself you need to sit, think and ask simple questions like “why do I need $5 million in retirement funds after I am 60 yrs old?”, “what if I save just $4 million and spend the remaining $1 million on improving my family’s current standard of living?”, and other questions on those lines. With $5 million you will certainly die rich, but is that your financial goal? I am talking in terms of millions just to make a point, you can replace that with whatever your retirement goals are.

Simply setting a numerical goal is not enough, you need to ask “WHY?”. If you don’t ask this early on, you are going to cause yourself and your close relations a lot of financial stress. Moreover, you will surely reach a point where you have a lot of retirement money, no ideas about what to do with it, and plenty of regrets about what you could have done with it if you had spent it at the right time.

Most PF bloggers won’t like what I am saying, because it doesn’t technically fit in the ideology of “letting go short term gratification for long term gratification”. I subscribe to that ideology myself, but my yardsticks for what is “short term” and what is “long term” are different. For me, the ability to buy something when I “need” it is “long term gratification”. For example, I won’t care if I save $1,700,000 instead of $2,000,000 for my retirement, if I am spending the $300,000 in getting my family a better house in a better location and neighborhood when they need it. And if spending those additional $300,000 will not allow me to maintain my current standard of living after I am 60, so be it (anyways, my most productive years will be over by then). At least I will be a lot happier that I spent the money for a better cause at the right time and that is plenty of long term gratification for me.

Having said this, I want to make it clear that this does not in any way mean that people should not worry at all about retirement. It simply means that they should be resonable when worrying about it.

Bottom line: Not worrying at all about retirement is definitely foolish, but worrying so much about it that you make major compromises in terms of your family’s comfort and standard-of-living, just so that you can live a better life after you are 60 yrs old, is also foolish.

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