16 January 2018

Will You Be Able to Retire?

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No matter how much money we may be saving for retirement, one nagging question lingers: Will it be enough?

Online retirement calculators aim to help solve that mystery. They can be useful tools, but don't rely on them for bankable forecasts, experts say.

"They are good because they give people a rough idea of how much they have to save," says William Bernstein, co-principal of portfolio manager Efficient Frontier Advisors in Eastford, Conn. "They are bad in that they pretend too much precision."

A calculator can be like a compass, telling you whether you are heading in the right direction, but you still have to take the steps necessary to reach your goals, which for many people means controlling spending and saving more.

Retirement calculators have proliferated as traditional pensions grow scarce and Americans take greater responsibility for funding their retirement plans. They typically ask for basic information such as age, current salary and savings, expected return on investments, anticipated Social Security benefits and life expectancy. Many calculators also ask how much you want to spend each year in retirement.

Based on that data, they try to determine whether you are on track to meet your goals or in danger of running out money before you die. Some also tell you how much more you should save now to boost the odds of a comfortable retirement.

Yet the calculators rely on answers to questions that often are impossible to know in advance, and if the numbers you plug in turn out to be off-base, the numbers that come out will be, too. And bad numbers could translate into you having a lot less money than you expected.

Take a 45-year-old with $100,000 in annual income and $250,000 in savings who is preparing to retire at age 65 and is saving $12,000 a year. If she predicts her investments will grow 8% a year, one popular retirement-income calculator—offered by asset manager Vanguard Group—says she would have $5,639 in monthly retirement income, including Social Security. If that proves too optimistic and her investments grow only 6% a year, she would have only $4,699 a month.

Retirement calculators often present their responses in different formats and using different terms, which can make it difficult to compare results. Many companies provide them to participants in their 401(k) plans.

Darrow Kirkpatrick, a 53-year-old former software engineer in New Mexico, got widely divergent answers from several different calculators when he viewed the outlook for a married couple, both 60 and about to retire.

Mr. Kirkpatrick's conclusion? "It's best to run several calculators and compare the results."

Here is what you need to know about getting the math right—and understanding how it could go wrong[…]

Click here for the full article in the Wall Street Journal.

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