I do not like retirement calculators. After many years in the financial advice industry, I see them as misleading and certainly not a tool to base long-term plans around.
And yet, the most commonly asked question in financial planning is “how much will I have to retire on?” Attempting to accurately answer this is the same as answering “how long is a piece of string” but with a far less reliable outcome!
The amount someone needs to enjoy a comfortable retirement is a purely personal goal. And it is certainly a function of your earning ability. A salary of $500k pa is better to create a far more luxuri- ous retirement than $50k pa.
And then the investment returns. Market volatility has the uncanny knack of destroying 5 years re- turns in the blink of an eye. It could then take another 5 years to claw back to where you were. Do retirement calculators factor in this normal market activity. If they do, I have never seen it.
And let’s not forget the fees charged by institutions to manage your funds. A mere 0.5% can make tens of thousands of dollars difference at the end of 30 years. Do you really think an institution will keep their fees the same for 30 years? According to their retirement calculators, they will be!
As you can see, there are so many variables which all have an effect on your final retirement balance.
Well, it seems that it is not so difficult to give a definitive answer. Our large financial institutions have come to the rescue and developed ‘retirement calculators’ to visualise your future superan- nuation balances.
All you need do is input some information and, bingo, you’re presented with a graphical depiction of future saving. So easy and so helpful. Oh, thank you, large financial institution for thinking of us.
So, do Retirement Calculators really work?
Will these retirement calculators really giving any help towards an exact figure of our future super- annuation balances – probably not? Sadly they rely totally on past information and assumptions.
Results based on just these factors, therefore, make them a product of mathematical equations, and not worthwhile predictions.
Often the rates of return used for a projection, are an average of past returns. So what’s the prob- lem? Go to the fine print, and it clearly states that ‘past performance is no indication of future returns’.
Mmm.. a contradiction or what? Our esteemed financial institution has, on one hand, told us not to rely on past performance and then planned our future well-being around the same returns.
Other required inputs like salary, inflation rates, and retirement income estimates are locked in for a calculation that may span 20, 30 or 40 years. A fixed percentage increase per year is used to acknow- ledge any form of growth or change in these circumstances. Not really how the real world is. Can you recall when you last had a decent pay rise?
Projections of any type, by whatever method, within the financial advice area, should be taken with an enormous grain of salt. Forecasting is certainly nowhere near an exact science, and the methods used in these calculators are just compound interest calculations. They should not be relied on to develop your retirement plans, that’s for sure.
Superannuation is a very long-term investment and should be treated as such. You really should be monitoring your fund on a six monthly basis, and reviewing your investment strategy in terms of your financial goals. Here is a post to help you.
There are many major events that have an impact on your investments. Some are short-term, others much longer. You need to stay abreast of these events and alter your investment course if need be.
Remember, long-term investments such as superannuation require short-term attention, to ensure success. They are certainly not set and forget based on a retirement calculators results!
Thanks for reading and see you next time. Homepage
