Our featured writer, Richard Eisenberg, continues his analysis of the benefits of planning for financial independence instead of retirement. This, the second part of his article, includes a review of several retirement calculators. These calculators can give you a sense of what sort of capital is needed in order to realize the type of retirement you wish to have. As you will see, not all calculators are the same. So, choosing the right one is important. FFN Editors
Plan For Financial Independence, Not Retirement (Continued)
Richard Eisenberg, Contributor to Forbes Magazine, Personal Finance Section (www.forbes.com)
Two Types of Retirement Calculators
If you’re trying to figure out your Financial Independence day, should you bother using an online retirement calculator? I think it depends on the tool.
Most retirement calculators are actually best for people in their 20s, 30s and early 40s who have years to save furiously once they see their “number.” The electronic number crunchers typically ask few questions, partly because younger people can’t possibly determine for sure their retirement income sources or expenses.
“When you’re further away from retirement, these calculators are directional in nature,” says Kent Allison, a PwC partner and leader of the firm’s financial education practice, based in Florham Park, N.J. “When you get closer to retirement, you really have to get into a nitty-gritty cash flow analysis.”
He’s right. If you’re three to 10 years away from retirement, that’s the time to figure out where the money will come from to cover what Pat O’Connell, executive vice president for the Ameriprise Advisor Group, calls the three types of expenses:
Essential expenses that’ll be covered by guaranteed income sources, like bonds, Social Security and a pension.
Lifestyle expenses purchased with money from your investment portfolio.
Unexpected expenses, like health care and long-term care costs, paid for out of your emergency savings fund.
Three Good Calculators for People 50+
There are, however, a few excellent calculators – not always free – that are specifically geared for people in their 50s and 60s. They can help you firm up a retirement cash-flow analysis.
One is Retirement Works2 for You, created by retirement adviser Chuck Yanikoski primarily for what he calls “nonaffluent people trying to play their cards as smartly as they can.” It costs $189 for the first year; annual renewals are $44.50.
RW2, as it’s sometimes called, asks a lot of questions; Yanikoski says you should plan to spend one to three hours answering them. (“Retirement is an extremely complicated thing,” he says.) But the results can be valuable.
As soon as you input your data and answer the questions, you’ll get an online report card with retirement planning advice and letter grades telling you how well you’re set under “normal” circumstances, if you live an extra long lifetime, if your investments don’t perform well, if inflation shoots up and if you run into high medical expenses, including long-term care.
You’ll also see how your cash flow would be affected if you delayed retirement and lowered your standard of living.
Two other calculators worth considering:
The free Ballpark E$timate from the Employee Benefit Research Institute’s Choosetosave.orgsite and the American Savings Education Council; Next Avenue has a link to the Ballpark E$timate calculator.
E$Planner, created by Lawrence Kotlikoff, an economics professor at Boston University. There’s a free version of E$Planner Basic as well as one that costs $40, with “what if” investment scenarios and Social Security options. The downloadable $149 product also offers “retirement spend-down” strategies, helping you determine how much to withdraw from your portfolio.
Use an Adviser to Plot Your Findependence
Whether or not you use a calculator to come up with your Financial Independence Day, I strongly suggest you work with a financial adviser to run the numbers.
“The decisions are major,” Allison says. “A wrong one could cost you a lot. So even if you don’t normally want to spend money on a financial planner, this is the one time to do it.”
Richard Eisenberg is the senior Web editor of the Money & Security and Work & Purpose channels of Next Avenue. Follow Richard on Twitter @richeis315.
(This article is available online at: http://www.forbes.com/sites/nextavenue/2013/07/01/plan-for-financial-independence-not-retirement/)
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(Disclaimer: The views expressed in the above article are strictly those of the author. They do not necessarily represent those of FFN. Please use due diligence prior to applying the concepts, recommendations and/or purchasing any products or services offered by the author). FFN Editors