PLANNING AHEAD: Reasons why retirement calculators might be wrong [Columns]

Recently an online article, admittedly from a commercial source advertising services, caught my attention. The title was “5 Reasons Retirement Calculators Can’t Be Trusted.”  The following statement by the author, Todd Tresidder, of financialmentor.com provided the following explanation: “Reveals the Dangerous Assumptions Hiding Behind Your Retirement Estimate and Provides 5 Simple Steps to Solve the Problem.”  I had the opportunity to read the article through and note that, while financial mentor has some good points relative to evaluation of standard retirement calculators, even Todd missed some points I would make.

Recognizing that none of us is infallible and as some would say “stuff happens,” there are, nonetheless some issues that have not yet creeped into the software programs and other calculations that are used to arrive at confident predictions for retirement planning, for which the main issue is “do I have enough to retire?” or stated in another way, “do I have enough to last me for the rest of my life?”

Still, Tresidder makes some good points and provides a fair description of traditional retirement calculators. (In the interest of full disclosure I have myself studied financial planning but did not complete and take the daunting Certified Financial Planner exam).

Obviously, this is an important question since no one wants to retire and then find out he or she does not have enough money to continue the life style.

Here is a summary from the article.

Retirement Calculators.  As the article states, “…all retirement calculators use the same base assumptions to work their magic:

• Retirement age

• Life expectancy

• Inflation

• Investment return

• Portfolio size

• And expected retirement expenses…

Some calculators will require more information depending on their sophistication. Others will work with less information because they assume answers to some of these inputs…The point is the math…They’re all calculating the same thing in roughly the same way using roughly the same input. That takes us to our first deception when using retirement calculators…”

The first “deception” is described as believing the critical factor is the calculator used instead of the assumptions used by the calculator. There is a brief description of “Monte Carlo” calculators which are often used to attempt to predict a range of possible results. If you have worked with a financial planner, there is a good chance your planner used Monte Carlo simulations and frankly that is a good starting point.

In another article, Kathleen Coxwell in www.newretirement.com describes “Monte Carlo Simulations: A Sophisticated Way to Predict Your Chance of Financial Success” as “when you run a Monte Carlo analysis, a computer is doing thousands of calculations to predict a range of outcomes and determine what is:  A worst case scenario, A best case outcome, Everything in between…”  In other words, by taking multiple variations into account the financial planner or professional is trying to predict what may happen in the future.

What Tresidder does in his description is point out that it is the underlying assumptions that make the difference. He states “…essentially the answer is baked into the cake by the assumptions chosen. It’s just math.”

The assumptions Tresidder lists include:  “How Long Will I Live?” “How Much Will I Spend?” “How Should I Estimate Inflation?” “How Much Will My Investments Return?” In fairness, all of these things are taken into account by most competent planners but past experience or standard answers do not always answer the individual issues.

One point I would make on my own is that health and living arrangements which are critical to decision making regarding the viability of a portfolio are generally disregarded. These seem almost always either to be left out or given short shrift in standard software programs. Some do not even include medical expense or health insurance premiums in the options. If you live to age 100 but are healthy until age 99 your plan is going to be very different than if you experienced multiple health emergencies beginning at age 70. If you continue your retirement at home and never travel, the result will be very different than if you move to a continuing care retirement community and make worldwide travel a priority.

Tresidder notes that plans change. They cannot be placed on a shelf. Financial assumptions need to be updated. These are some of the issues we consider when advising seniors regarding their financial plan and not just estate documents. It makes a difference.

Janet Colliton, Esq. is a Certified Elder Law Attorney. Her practice, Colliton Elder Law Associates PC is limited to elder law, retirement planning, life care, special needs, guardianship, and estate planning and administration, with offices at 790 East Market St., Suite. 250, West Chester, 610-436-6674, [email protected]  She is a member of the National Academy of Elder Law Attorneys and, with Jeffrey Jones, CSA, co-founder of Life Transition Services LLC, a service for families with long term care needs.

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