Lessons from the Pros

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Using Online Retirement Calculators: Will You Die Poor or Wealthy?

It’s a question that keeps many baby boomers up at night: Will I have enough for retirement?

The problem comes from several converging circumstances. First, as the U.S. national emphasis switched from employer-run pension plans to self-directed private plans, many people underestimated the amount they needed to put aside. Second, most folks stayed with a “buy and hope” strategy through the 2008 crash, and are still struggling to recover the money they lost then. And third, we’re living longer than our predecessors—which is generally good news, except that the same retirement funds need to be stretched farther to make sure you’ll have enough.

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So how do you find out how you’re likely to fare on your own retirement? An online search for “retirement calculator” will turn up several pages of links to interactive worksheets, most provided by the news media or brokerages and financial institutions. There’s even a website that reviews retirement calculators, with evaluations of the pros and cons of the interfaces and calculations available. Online Trading Academy also has an easy-to-use Retirement Planner that you can try here.

Under the surface, most of these calculators work the same way. You input your current age, the age at which you expect to retire, and the number of years you expect to spend in retirement before death. You enter your current retirement savings and what you expect to contribute yearly between now and retirement. Then you choose an investment profile (this defines your rate of return) and specify what percentage of your current income you’ll need to maintain your current lifestyle. (The number is typically around 75%, assuming that expenses and taxes will be lower and you’ll get at least some support from Social Security.)

And then you get your result—which most folks will prefer to take sitting down. If your scenario is typical, the calculator might show you running out of money at age 75 or 80—presented through a cheerful narrative accompanied by a graph that shows your wealth swelling, then declining, and finally flatlining. You can try another calculator and perhaps get a slightly different result, but eventually you’ll come to the realization that something needs to be done.

What are your alternatives if the calculator says you fall short? The easiest though not necessarily most appealing scenario is to put off retirement for a few years—that has the double benefit of giving you more years to make up any savings shortfall, and fewer years in which you’ll have to live on those savings. Or, you can determine to ratchet back your lifestyle and make the same money last longer—even less appealing.

Then there’s the scenario taught in ProActive Investor and other Online Trading Academy classes aimed at long term wealth accumulation: increase your annual rate of return. Go back to those same retirement calculators and run the same scenario with an assumed rate of 12% instead of a typical 8%, for example, and the difference can be dramatic. You may even be able to project yourself living the lifestyle you want, on the money you have now, with no other adjustments than better results in your trading or investing. No wonder there’s so enthusiasm in our OTA classrooms.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.