And if you’re getting them for free, beware even more.
Until about ten years ago, you couldn’t find a serious financial model to show you what might happen to you in your retrirement years. Now there are quite a few of them, but you might have actually been better off in the old days.
The question most of these models is trying to answer is: how much money should you be withdrawing from your savings to cover your expenses every year, once you retire? And the real purpose of these models is: getting you to let someone else manage your money for you.
Niether of these is necessarily in your interest.
First, “how much money should you withdraw every year” is the wrong question. The odds that you will live at least 20 years in retirement are better than even, and there is a significant chance that you will live 25, 30, or even more years. But the odds that you will need to spend an essentially level (or smoothly increasing) amount of money every year for that span of time are approximately zero.
Some years ago, I started making a list of the reasons that income or expenses will either spike sometime during retirement (i.e, show a large one-year variation) or undergo a permanent shift (either up or down), and I stopped when my list got to over forty items.
To mention just a few examples, if you retire and are still paying off a mortgage, your expenses will suddenly go way down when that pay-off finally occurs. If you’re married and one of you dies, there might be a spike in either income (from life insurance) or expenses (medical and funeral costs) or both, plus permanent changes in household expenses and in Social Security and pension benefits. Or you might have large expenses one year due to severe storm damage or a serious illness or because a child gets into a jam and needs help. Or you might have a one-year influx because of an inheritance. Or you might decide to move (or have to move for some reason) and your expenses could change in either direction, and you could also have extra expenses that year or a big intake of cash if you move from a big house to a smaller one or a rental. If you need to go into assisted living some day or into a nursing home, your expenses will probably shoot up and stay up.
So, as I said, the chances that you’re going to need anything resembling a level withdrawal from your retirement savings is pretty much zero. And if financial companies or their representatives try to answer the question of what the amount of your annual withdrawal should be, they’re just throwing dust in your eyes. I actually consider the use of such models to be financial malpractice, but at the very least, they are a sign that the person you are dealing with isn’t even trying to really understand your situation, and the company they represent is just trying to sell you on a financial product or service.
And that’s the other problem. Your retirement finances involve a whole lot more than your 401(k) account, or your private savings, or whatever it is the financial company is after. You might need professional investment advice, or some financial product like an annuity, but the reality (or not) of that need has nothing to do with the financial models you are being offered. As I say, they are just dust in your eyes.
So what do you need? If you are, or think you might be, in any danger of running out of money before you run out of days of your life, then you need a much more careful analysis. Not an amazingly complex analysis, with pretty graphs, showing how much money you can “safely” withdraw from retirement every year, but a model that looks at your entire financial situation. Not just your investment income, but all your income, and all your expenses. And not just that, but all your assets and debts and potential insurance benefits. Not to mention information about your family and your plans and your preferences.
After providing that information, you should be able to get concrete advice on the financial moves you should be making, along with an analysis of whether those changes are going to be enough for you. And if they aren’t, you should be told how much you’d have to reduce your lifestyle, or how much longer you’d have to keep working if you’re not retired yet, to put yourself in a reasonably sound position.
People and companies who want to run numbers for you so that they can sell you an investment plan or an insurance or annuity product, almost never are using a financial model that looks at the whole picture, or that can form a legitimate basis for appropriate decision-making.
If I sound passionate about this, it’s because this has been a principal focus of my own work for over 20 years. (My own model was developed mostly for professional use, but if you want to see it, you can visit the consumer website, where you can get either a full-powered version for a price, or a more limited version for free.) As with anyone who has worked very hard to do something special, I get annoyed when others, especially people who should know better and could certainly do better if they wanted to, take that specialty casually, or just botch it up.
Even allowing for my own bias, though, the commercial models really do not measure up. Only the Fidelity Investments model is even a plausibly decent one, and it still leaves too many important elements out. And since it doesn’t look at the whole picture, it can’t be trusted to give you the right advice. But at least Fidelity is trying, and at the rate they are improving their model, it might be pretty good sometime in the future. So we don’t have to give up on them. I don’t know any other financial companies that are even seriously trying.
Let me know if you think you’ve found one !
Chuck Yanikoski is a retirement adviser who lives and works in Harvard. For more about him, or to contact him directly, visit www.ChuckYRetirement.com.