"Get Your Finances Ready for Retirement," -Calculating Your Retirement Readiness
Monday, December 22, 2008SUZANNE PRATT: In light of this year's plunging portfolio values, many workers wonder whether they're still financially on track to retire. One way to find out is to use an online retirement calculator. As we continue our series, "Get Your Finances Ready for Retirement," Connie Hicks reports those calculators aren't all the same and some are more accurate than others.
CONNIE HICKS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Anthony White is a careful man, both when he flies and when he works as an air traffic controller. He's also careful in planning the finances for his upcoming retirement.
ANTHONY WHITE, AIR TRAFFIC CONTROLLER, FEDERAL AVIATION ADMINISTRATION: I would think that I'm in pretty good shape.
HICKS: To see if he is on course, we suggested White go online to check his financial progress on three free calculators. The ballpark estimate calculator at choosetosave.org, the retirement calculator at aarp.org and the how much will I need to save for retirement calculator at Yahoo!.com. On all three, he used the same numbers and assumptions, including: retirement at age 55, a lifespan extending to age 90 an annual 3 percent inflation rate, annual investment returns of 5 percent in his pre- retirement years and 4 percent in retirement.
You'd probably expect that by using the same baseline numbers and assumptions, that the financial flight plans on all three calculators would come out about the same. But as it turns out, there are some big differences. The choose to save ballpark estimate calculator found White's finances to be in excellent shape. Between his pension and savings, it figured he'll collect 93 percent of his current income in retirement. While the projection of AARP's calculator was a little less rosy, it still found he should come out ahead, retiring with a 4 percent income surplus. But the Yahoo! calculator warned that White's retirement finances are in danger of falling far short. To have enough income, it said he must save well over $300,000 every year until he retires. White's not worried though by Yahoo!'s finding.
WHITE: I was a little surprised, but I recognized that they didn't consider pensions, which is something that I will have when I retire.
HICKS: White did identify a problem. Yahoo! never asked him to plug in his generous Federal pension, which is a big part of his retirement plan. Yahoo! doesn't deny that and says it is working to update its retirement calculators. Michele Gambera of Ibbotson Associates said, in general, the fewer the questions, the greater the chances for error.
MICHELE GAMBERA, CHIEF ECONOMIST, IBBOTSON ASSOCIATES: It's not surprising because the calculators ask very different questions. For example, some ask whether the person is contributing to a 401k or some sort of a retirement plan and others not, so this makes a humongous difference.
HICKS: But Kerry Hannon of "US News & World Report" says the simpler user-friendly calculators can still be useful.
KERRY HANNON, RETIREMENT CORRESPONDENT, U.S. NEWS & WORLD REPORT: It really forces you to sit down for a second and take a look at how much am I setting aside for my retirement and what might I need when I do retire?
HICKS: Sometimes the problem isn't the calculator, but the numbers put in by the user. Jack Vanderhei, who designed the interactive ballpark estimate calculator, says it's easy to underestimate your life span, by using the national average.
JACK VANDERHEI, EMPLOYEE BENEFIT RESEARCH INSTITUTE: A lot of individuals will just haphazardly pick what their life expectancy is when they hit their retirement age and in essence have a savings goal that by definition, is only going to be relevant 50 percent of the time.
HICKS: Because retirement calculators aren't foolproof, Gambera says it's a good idea to try out several calculators.
GAMBERA: If they seem to be on track with most of these calculators, they are probably doing it right. So the next thing is maybe to ask some respectable, reputable professional for the help.
HICKS: From his work, Anthony White knows flying by the numbers is important. So he'll continue to keep a close eye on the coordinates of his retirement plan. Connie Hicks, NIGHTLY BUSINESS REPORT.
KANGAS: Tomorrow, as General Motors closes its doors in a small Wisconsin town, we look at the impact on the community.
