Retirement Calculations

Are you paying active management fees to invest in a bunch of index funds? Why does that make sense for anyone except your financial advisor, who is spared the burden of having to do something to earn his keep?

In some (rare) cases, maybe your financial advisor is actually helping you develop and monitor a financial plan for your retirement years. I mean, a real plan. One with financial projections to help you see whether you've saved enough money to retire in the way you've imagined. A plan that examines any estate tax liability with options in place that prevent you from paying anymore to the tax man than is necessary. You know, a real working document that makes it clear how much you need to be saving so that you've truly saved "enough."

Your advisor isn't doing that? I didn't think so. Most don't. It is a lot of work, which tends to get in the way of the advisor's true calling - which is to lower their golf handicap as much as possible, which takes a lot of practice. Real work, the kind that benefits clients, kind of gets in the way.

So some folks might want to go online and try out a "retirement calculator" to do what their advisor should be doing for them, but can't or won't because his swing developed a hook that is just ruining his long game, and the only way to get rid of it is practice, practice, practice.

In fact, CBSMarketWatch just reviewed several calculators in a recent article titled Retirement by the numbers.

Online calculators can help you get a sense of whether you've saved enough money to live the life to which you would like to become accustomed after you hang up your canary and say good-bye to your friends in the coal mine. These calculators can only provide a general answer, but that's true of the most sophisticated planning programs available on the market. They all need to be used with a giant sense of skepticism. Though they calculate answers to the penny and draw charts and illustrations that extend out until the investor reaches the ripe old age of 119, in reality the investment markets rarely perform as expected, on cue, and the assumptions that go into a plan are usually quite different than the reality that one experiences as the plan unfolds and real life takes root. How many planning programs took the technology crash into account? (Answer: none. It's the planners job to try to avoid "garbage in / garbage out.")

On the other hand, unless you've got a sixth sense that gives you an innate sense of the time value of money and the ability to discount cash flows to net present value over a 30-year time span, remembering to factor in Social Security income, a calculator is the only way to get your arms around the question.

Will I have enough to live on in retirement? Can I afford to retire at all, or will I be singing with the canaries down in the shaft until the day I finally bite the dust and go to meet my maker?

And when you do finally cash in your chips and pass on to that big worldwide web in the sky, you might want to ask the big guy why we can't know more precisely just how long we need to plan for when we're using these retirement calculators. It would certainly make the job a lot easier.

Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

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