Retirement CalculatorsTools Or Fools?
You know what I'm talking about, the online calculators, the retirement planning tools that plot that bright green line you must follow to get the future you have dreamed of. And they have likely made you feel more confident in your financial future. You have headed back to bed, with a little spring in your step, for a sound night's sleep.
Well, a new report has been published that might keep you up at night once again. A group of researches at Texas Tech University conducted a study of 36 of the most common tools I just described and found that the results those tools provide are, for the most part, "extremely misleading." Those tested weren't just a spattering of tools with no legitimate brand backing. Authoritative companies, such as Vanguard group, AARP, Marketwatch, T. Rowe Price, and even FINRA itself, provide the tools included in the study.
The research used a hypothetical case study of a couple earning $50,000 each, in their 50s, planning to retire at around age 65. A thorough review of this hypothetical couple's financial situation, using software available to financial professionals, found that they have just over a 50/50 chance of having enough money in retirement. But, the majority of those online retirement tools tested gave that same couple 70 percent or greater odds of being able to cover their expenses in retirement.
What consumers love about these tools is also their Achilles heel: their simplicity. When you hop on the computer at 2 AM, you want quick, easy, accessible answers. But the research found that a successful assessment of someone's financial future depends on much more than answers to the questions asked by these tools. Everything must be taken into consideration, such as personal health, family history, Social Security expectations, possible inheritances, and more.
One of the other challenges with these tools is that many of them make assumptions about things like inflation rates, returns on stocks and bonds, life expectancy, etc... We all know what happens when we assume anything.
Well folks, I think your future deserves more, and my advice is to speak with a financial advisor who specializes in comprehensive retirement strategies to have him or her review the finer details of your plan. It is important to look at your retirement strategy from three different angles.
The first is from a tax standpoint. A complete review of your tax return is necessary to determine what your current tax situation is. This will help you identify any potential tax issues that need to be addressedthings like phantom income taxes, incorrect uses of taxable and tax-deferred income sources, and missed opportunities for offsetting gains with losses.
The second thing that must be done is an income analysis to determine if you are using your income sources properly. This will help to assess whether you will have adequate income to meet your future needs, while adjusting for the cost of inflation. This analysis may use inflation rates that are different than government-quoted inflation rates or the "assumed" rates used by those online calculators, as everyone's rate is different based on the goods and services that he or she consumes.
Your tax and income strategies must work cohesively with the third area of importance, your investment strategy. An analysis of your investment strategy must start with a risk assessment. Your current strategy must be back tested to evaluate how that strategy behaves in both good and challenging markets to determine if the current strategy aligns with your risk assessment. Successful strategies must have a process to exit the markets to help minimize losses, as well as a process to enter the markets. Research shows that many investors incur losses and have poor investment returns because they have more risk than they are comfortable with and have strategies that do not protect the downside. Knowing your true risk appetite and having a strategy that is designed specifically for that risk appetite will help you sleep more soundly.
Folks, many financial experts and online tools try to make retirement planning look easy, but if done correctly, it is not.
Questions? Comments? Ask Todd!
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by radical promoting and their editorial staff based on the original articles written by jeff cutter in the falmouth enterprise. This article has been rewritten for Todd Schneiderand the readers of Schneider Family Finance. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.