That Retirement Calculator May Be Lying to You

[marmar]

(Bloomberg) Anyone who puts even minimal elbow grease into retirement planning is well aware of "the number," the anxiety-producing seven-figure sum online calculators and financial advisers say you'll need to enjoy a comfortable lifestyle after your career ends. There's a far smaller number that deserves more attention now -- the rate of return at the heart of that calculation.

According to Ibbotson data, the long-term annualized gain for the Standard & Poor's 500-stock index dating back to 1926 is 9.9 percent. For bonds, it's 5.4 percent. (From 1970 to 2010, the Barclays Capital Aggregate Bond index average was 8.3 percent.) Plug those numbers into a portfolio of 60 percent stocks and 40 percent bonds and the return is about 8 percent, which is precisely the number most financial planners -- and retirement calculators -- were using up until recently.

With bond yields at record lows and stock dividend yields less than half their long-term norm, however, expecting portfolios to deliver returns in line with those historical averages may be a dangerous assumption. Using lower return numbers and seeing a higher savings target emerge may be a harsh reality check, but better to grapple with it now than be shocked when there's less time to ramp up savings or cut spending to remedy a shortfall.

Today many advisers are looking out a decade or so and lowering the rate of return they expect from stocks and bonds. Jon West, a director at Research Affiliates, which manages $50 billion, says the firm's number crunching leads it to estimate that stocks could deliver 5 percent to 6 percent, and bonds 2 percent or so. That's based on getting "at least 2 percent less from dividends," anemic earnings growth, and no growth in the stock market's price-earnings ratio, he says. It produces a return below 5 percent for a 60/40 portfolio. That's a far cry from 8 percent. ............(more)

The complete piece is at: http://www.bloomberg.com/news/2011-10-03/that-retirement-calculator-may-be-lying-to-you.html

[hobbit709]

1. There's no "maybe" to it.

No one I know ever got anywhere near the money out of the accounts they were promised. One friend of mine is getting about 55% gross of the retirement fund payments she was promised after her 30 years with the institution she worked at.
My mother gets about $100/mo out of her retirement to supplement her SS chack of $750/mo.

[annabanana]

2. These accounts were ALWAYS meant to sucker people into

the market casino using money that they couldn't afford to lose. It was meant to free business of responsibility to their workforce.

[tularetom]

3. What's worse is that the distribution formulas for IRA's

are calculated using these same assumptions.

Which means that you are forced to withdraw money from your account assuming that your funds are earning 7 to 8 percent or better.

Under current conditions many people who assumed their IRA would last until they die will be quite unpleasantly surprised in their late 80's or 90's when the money runs out.

[FarCenter]

4. The real number has always been around 4% per year withdrawals

You have to base withdrawals on the after tax difference between the percent earnings and the rate of inflation.

[dickthegrouch]

5. Bloomberg doesn't want to scare us too much

That's why they say "may be lying". For the richest 1%, it is not lying so they covered their asses.

I have never got anywhere remotely close to the 10% that Suze Orman and others keep bandying about. And when I questioned even 8% from my NY Life agent he had no comeback. I wanted to use 3% as a realistic number and I'd be delighted with anything better, he left and has not returned with the promised re-work. I'm re-aligning and taking back my premiums.

The whole financial industry is crying out to be regulated in the same draconian way they want on things like immigration and undocumented aliens. It really is time to toss the whole financial code and re-write it with practical, sensible controls and punishments.