How to tap your retirement nest egg

Kotlikoff admittedly has a horse in this race. As the president of Economic Security Planning, he spent 13 years developing his own retirement planning software, ESPlanner, available to download for $149. ESPlanner's approach does away with setting future spending targets altogether. Instead, it focuses on determining your highest sustainable living standard while factoring in such life changes as income, family composition, special expenditures, bequests, downsizing and year-by-year federal and state taxes.

In short, it thin-slices your financial picture to calculate what Kotlikoff says is a more realistic spending model, one that ebbs and flows as your wants and needs change.

Gone is that particularly vexing rule of thumb, guesstimating your date of death (the financial industry has traditionally suggested you add two years to the number of years your parent of the same sex lived; controversy surrounds this advice like a dust storm).

"A lot of these Web sites are focused on your life expectancy. That's completely inappropriate. It should be based on your maximum age of life," Kotlikoff says.

OK, so maybe most retirement calculators are more chain saw than scalpel. At a time when the average American's savings rate has dropped into negative numbers, shouldn't we encourage people to err on the safe side and save more? What's wrong with over-saving anyway?

"What's wrong with it is, you could die," Kotlikoff says. "You may want to party big-time from age 78 to 100, but you may die at 62. As fiduciaries for our current as well as our future selves, we have to make sure we don't squander our youth rather than our money."

Kotlikoff estimates that the financial industry's helpful calculators not only fudge your future needs a little; they miss the mark by a mile. In comparing his ESPlanner calculations with the online calculators of three major financial institutions, he found that Fidelity was 36.4% higher, Vanguard was 53.1% higher and TIAA-CREF was 78% higher.

"These calculators out there are incredibly primitive and dangerous," he says. "Nobody should be handing out financial advice on a casual basis, and that's what is going on systematically throughout the industry because the industry is interested in selling product, not giving advice. They're overdoing it with a lot of people."

'A dynamic process'

The financial industry has met the accusations with a mixture of patience and bewilderment. After all, how can anyone question how much Americans are saving when all indications are that Americans are not saving nearly enough to carry them down the back nine?

Fran Kinniry, the principal of Vanguard's investment counseling and research group, says the naysayers are ignoring some inconvenient truths.

"We've done quite a few research situations on this. Most of their assumptions underestimate the historical volatility of markets. If you want to use average rates of return for markets, then potentially the calculators are too high, but if you typically think about markets being cyclical, it's very difficult to say that investors are saving too much," Kinniry says.

Think of it as a game of musical chairs: If the markets are with you in retirement, you get to keep your chair; if they cycle downward, however, you may lose it. Literally.

In fact, Chad Peterson, a spokesman for TIAA-CREF, says traditional targets may be a little low.

"Extensive research and empirical evidence gained through our nearly 90 years of helping millions build financial security in retirement suggest people should aim to replace approximately 80% of their pre-retirement income when they stop working," Peterson says. "Some experts believe that this 80% replacement estimate may even be on the low side, given the potentially higher costs of medical and long-term nursing care projected for the future and increased individual longevity."

Jenny Engle, a spokeswoman for Fidelity Investments, says that though Fidelity's online tools default to an 85% pre-retirement income savings rate, the key is to keep using them to adjust both pre-retirement savings and post-retirement spending.

"We've taken what we believe is a realistic, if somewhat conservative, approach to building our tools," she says. "These tools help them really develop quite a robust income plan; they can modify it, use different scenarios and alter the withdrawal rate that they might consider using based on their budget and the type of lifestyle they want to live. This is really a dynamic process."

Engle says a little controversy in the staid retirement planning industry might be a good thing.

"Our research shows very clearly that the majority of people are not saving enough for retirement," she says. "We think it's a healthy discussion and the more people are thinking about this and focused on it, the better off people will be and the more prepared for retirement they're likely to be."

Continued: Don't shortchange your next egg

< previous |  1 | 2 | 3 | next >