Fidelity Investments has a nifty new online retirement calculator. The tool, called the “Fidelity Income Strategy Evaluator,” goes beyond basic retirement calculators by suggesting which combination of products will best help you replace your paycheck.
A few details: You don’t have to be a Fidelity customer to use the calculator, and it’s free. It’s geared to near-retirees and retirees. For the most part, they’re done with savings and are focusing on spending. The idea is that it goes beyond basic retirement calculators by suggesting which combination of products will best help you replace your paycheck.
Check out my Forbes colleague Ashlea Ebeling’s post today about how “cool” it is.
Sounds promising. Even so, it got me thinking about all the caveats that go hand-in-hand with these retirement helpers.
When you tap into Fidelity Investments’ tool, the fine print warns:
- The projections or other information generated by Fidelity’s Income Strategy Evaluator Tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and not guarantees of future results.
- Numerous factors make the calculations uncertain, such as the use of assumptions about historical returns and inflation as well as the data you have provided.
- Guidance provided by Fidelity is educational in nature, is not individualized and is not intended to serve as the primary or sole basis for your investment or tax-planning decisions.
- Fidelity Income Strategy Evaluator is an educational tool.
The same is true of the slew of retirement calculators online, mostly free. Calculator assumptions—about how much money you’ll need in retirement, how well your investments will perform, and what toll inflation will take on your nest egg—can vary widely and affect your results significantly.
Then too, they often don’t consider your savings outside of retirement accounts, your pension, your real estate holdings, and even your debts. Fidelity’s new tool promises to lend a hand here.
The bright side is that they don’t require a lot of heavy lifting and can get you thinking seriously about how to take more control of your retirement stash. The upshot: it pays to plan, and by taking a crack at it with an online calculator, regardless of how basic, you have started the process.
Most people are clueless about savings goals. Less than half of workers (46 percent) now say they have tried to calculate how much money they’ll need for a comfortable retirement, according to the Employee Benefit Research Institute, up from only 29 percent in 1996. Yet, asked how they did the calculation, nearly half admitted they guessed. Only seven percent used an online calculator.
Even if you’ve been saving dutifully over the years, if you’ve transitioned between jobs (and careers), chances are your accounts are scattered between a myriad of investments from employer plans to tax-deferred IRAs, Roth-IRAs, and other holdings.
I can relate. My retirement accounts are split between different investment firms. And when it comes to my “number,” I’m quite sure it comes to $1 million or more in today’s dollars, based on my online calculations and discussion with my financial planner.
But it feels like a fantasy figure that bears little reality to my present reality. I’m one of those live for today kind of gals. The time to dip into those funds seems decades away. (Err…maybe not so many these days. Where has the time gone?) Nonetheless, since I have switched jobs several times in the course of my career and am now self-employed, I know it’s critical to have a cohesive snapshot of what I’ve got, so I periodically run a check-up.
I’ve found that people who have taken the time to calculate how much they need to save end up having a more satisfying retirement because it’s not such a panic. Doing nothing really isn’t an option.
Fidelity Investments’ myPlan Snapshot is a simple calculator to get you started. T. Rowe Price also has a turbocharged retirement income calculator, which uses a “Monte Carlo” methodology, testing a thousand possible simulations to model future uncertainty, even extreme market movements. And there are more detailed calculators, you can purchase. Laurence Kotlikoff, a well-respected economics professor at Boston University, for example, has developed his own tool, ESPlanner (available for $149).
Here are five tips for working with online retirement calculators:
1. Understand the numbers are hypothetical. The calculators are guessing too– an educated guess. The typical advice: Spend less; save more. Nothing wrong with that. My guess, though, is that using a calculator, will push you to get concrete advice from a financial planner or at least ante up your retirement contributions. Click through two or three calculators and a couple what-if scenarios—changing your investment mix, retirement age, and life expectancy—and watch the numbers swing. It’s a little crazy, but it will give you a feel for where you stand and what kinds of changes you can make to change it up.
2. Low-ball your returns. Many calculators use cheery assumptions. T. Rowe Price’s, for example, assumes a long-term annual return (before fees) of 10 percent for stocks and 6.5 percent for bonds; and 4.75 percent for short-term bonds. Today’s markets may warrant a more conservative approach, so click accordingly. No doubt, this will scare you into saving even more, but what the heck, it’s better to err on the side of more than less.
3. Expect to live longer. If you don’t put in a life expectancy, calculators often will assume you’ll live to 85. But chances are you will beat that. Obviously, the longer you live in retirement, the more savings you will need. EBRI’s Ballpark Estimate calculator lets you enter an expected age of death.
4. Plan on spending more. Estimating how much income you’ll need in retirement, usually referred to as a percentage of your current income, is simply hard to do. We’d like to imagine we will not need as much to live on. The standard advice has been to have enough set aside to generate 70 to 80 percent of preretirement income. But some advisers now say you should up it to 110 percent. Yikes. The truth is very few people spend less in retirement. They spend differently. Living longer and rising healthcare costs have to be considered as well. You do the math, but you’ll probably want to ratchet-up your postretirement income needs.
5. Be ready for the sales job. Sales pitches are littered across financial services company websites. Fidelity’s new site will send you off to links for Fidelity annuities and managed accounts, and other firm’s products, too-John Hancock, Mass Mutual, and so on.
If you’re ready to get down to business about your retirement plan, start by asking friends for references of advisers or consult groups like the Certified Financial Planner Board of Standards, NAPFA and Garrett Planning Network for help finding a financial planner.
No time like the present to run your numbers. In the next few weeks, you’ll be pulling out your tax documents to prepare your 2010 tax returns. Guess what? You’ll have details about retirement and investment accounts in hand. Take a few minutes and tap into a calculator or two and see where it leads. Promise not to freak at the estimated number. My guess is you aren’t that far off base. And yep, you really do need that much to retire comfortably.
Let me know how it works. I’d love your feedback on how helpful these tools are for you.
Here are a handful of basic online calculators to check-out:
- AARP
- The Employee Benefit Research Institute: Go to The Ballpark Estimate at choosetosave.org.
- Fidelity Investments
- Fidelity Income Strategy Evaluator
- T. Rowe Price
- Vanguard
Kerry Hannon is the author of What’s Next? Follow Your Passion and Find Your Dream Job, available here www.kerryhannon.com.
Kerry Hannon is a contributing editor to WhatsNext.com.
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