Friday, May 20, 2016

Good Advice and a Crappy Calculator

I know that all retirement savings calculators are crappy, and this one does have a slightly better feature in the advanced settings, but it's still...bad.  It assumes that you will need 80% of your pre-retirement income in retirement, but lets you move that all the way down to...60%.  The first number is just stupid and the second not really much better.

First off, if someone is already saving 15-20% of their income that is an immediate reduction off what you obviously need.  Simple enough, right?  But then it really isn't.  First off, if you are saving, say 15% now, as you get older you should have lower expenses: kids graduate and move off, house gets paid off, student loan debt paid off (or forgiven), you finally have a completely furnished home...  That may mean more leisure expenses, but it should also mean a larger amount going to least while you are still working.  I hope that by the time I retire nearly 50% of my (our) income will be into savings (even with a bit more going to things like vacation).

Now if you want your retirement to be full of [expensive] travel, that 60-80% may be right.  On the other hand, lots of people either continue to work in reduced fashion or take up hobbies that actually provide some income (winery, antique store, restaurant), and that gives another source, so, again, the calculators are not really terribly helpful for real people in real "retirement".

There is a secondary problem.  The above is really advice pertaining to upper-middle income families.  People in the top quintile or even decile of incomes.  When you look at middle income families, a different issue takes over: being able to meet the savings requirement.  It's very easy for a 6-figure income financial adviser to tell everyone to put away 10-20% of their income.  It's a lot harder for a family making the US (family) median of $62k/year to siphon 10% off and still get by, and it may be impossible for households in the bottom two quintiles.

No comments: