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RETIREMENT CALCULATORS
The most popular form of personal calculators are called "Retirement Calculators" because they figure out how much money a person needs to retire, or what level of post-retirement spending will be supported by person's assets at retirement. the calculators fall into three main groups:
1. Calculators with a small number of questions. The answers are combined with rules of thumb to generate an overall sense of what a person needs to have a comfortable retirement, defined as having enough money to live at a certain percentage (for example, 85 percent) of pre-retirement spending. Comments:
- These calculators are very useful as educational devices, showing how certain expectations about inflation and investment returns could work out.
- They are not very reliable for purposes of real planning because the rules of thumb may not apply to the person using the calculator. Omitted questions and answers may turn out to be crucial.
- These calculators are useful to large financial institutions in attracting the public to their websites. Examples: Fidelity, Vanguard and TIAA-CREF.
- They are also offered by news media like Bloomberg and CNN Money and by organizations representing the financial sector such as the NASD (parent of NASDAQ).
- The New York Times on January 28, 2007 (pp. A1, C4) published two articles that argue correctly that the elementary calculators are "not finely tailored." They use rules of thumb that may have biases. One probable bias is in favor of greater saving among companies that are promoting financial instruments such as mutual funds or annuities.
2. More detailed calculators offered free to customers. Another level of calculator is used for purposes of assisting customers in planning the date of their retirement and their investment strategy. This is offered often in the context of personal financial advice by companies with a mutual fund or private-client focus, like Fidelity or Morgan Stanley. Detailed questions are asked about the customer's willingness to take risk, assets, income and expense (actual andexpected post-retirement). The responses are entered into a company calculator which is used - either by the customer or the financial advisor or both - for planning pourposes. One of the most wide-ranging of the free calculators is the one offered by The Motley Fool.
3. Broader fee-based calculators extend the scope of questions. Some economics professors have argued that free calculators are designed to steer customers into the arms of financial institutions, for example by over-stressing the need for savings. Some new calculators are being offered (for an annual fee of $150/year) that are promoted as being bias-free:
- ESPlanner, created by Boston University Professor Laurence Kotlikoff and other economists.
- Financial Engines, started by Stanford Professor Emeritus and Nobel Laureate William Sharpe. |
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