Heather Havrilesky has an important piece in Salon about online retirement calculators, and she ultimately ends up in exactly the right place, albeit with a very low level of confidence. The right place, in case you hadn’t worked it out by now, is to ignore online retirement calculators. Which a reasonably numerate person could probably work out from this anecdote alone:
One day I decided to try out an online retirement calculator, just to reassure myself that we were well on our way to not just a secure financial future but also a rosy one. I plugged in my age (38), my current retirement savings (respectable), my desired income upon retiring (50K) and a few other figures, and pressed "calculate" with a little smile on my face, ready to be praised for my prudent savings and congratulated on the happy, golden years ahead.
Instead, I read these words:
"To retire with an inflation-adjusted retirement income of $50,000 for 20 years would require $3,075,744.65 in savings by the time you retired at 65. You need to save an additional $47,613.58 each year to reach your retirement goal."
Of course, nobody in the real world is saving $47,613 per year. But more to the point, you don’t need $3 million in savings to have an income of $50,000 a year for 20 years. How is such a thing even conceivable? After all, $50,000 a year for 20 years is a total of $1 million. If you invest $1 million in TIPS, it’ll keep pace with inflation. What’s the other $2,075,744.65 for? Emergencies?
The Economist has actually gone out and gotten a quote for an annuity paying $50,000 a year, inflation-adjusted, for the rest of Heather’s life, assuming retirement at 65, and the cost isn’t even $1 million: it’s only $827,000. What’s more, Heather’s currently in a house big enough not only for herself and her husband, but also for her two children. She’ll have paid off that house by the time she’s 65, and she probably won’t need something that big any more at that point — if she and her husband moved into a smaller and cheaper place, they could pocket the difference and put that towards their annuity.
There are also unexpected financial shocks — but those can come to the upside as well as to the downside. Inheritances can be larger than you expected, or they can be completely unexpected in the first place. Those stock options you currently consider to be worthless might turn out to be hugely valuable. That book you’ve been working on in your spare time for the past five years might end up a bestseller. Can you expect any of these things to happen? No. But along the way people do come into mini-windfalls. Save those, and you’re doing well.
Commenter dWj also makes a very good point on my last savings post:
I think very silly the idea that I should work making slightly increasing money every year until the day I turn 65 and then make no money thereafter, regardless of my net assets at the time. This is the way a lot of people seem to do "retirement planning".
Come 65, Heather is more than likely to be happy, healthy, and full of valuable ideas and skills. Is she really going to want to down sticks completely, write nothing for money, and live on nothing but savings? It’s not realistic. Most 65-year-olds these days are pretty healthy people; many of them want to work, especially when "work" is something like writing rather than any kind of manual labor.
Still, as I say, Heather’s ended up in the right place:
Finally, I start to consider how old I’ll be in 15 or 20 or 25 years, when all of this saving finally starts to pay off. Fifty-two, 58, 67 years old. Will I be healthy enough to enjoy my money, or will I be hobbling around wondering why I didn’t live it up a little more back when I was young and vivacious and still had teeth in my head?
So I take a deep breath, and I make a new, realistic savings plan, one that isn’t all that impressive and doesn’t grow very fast and doesn’t qualify us as "Millionaires in the Making." We’ll save as much as we can for retirement, and see how it goes. We’ll try to put a little aside for college, if we can. We’ll do what we can to avoid financial ruin. These days, that’s about all most of us can hope for.
More important, I’ll stop torturing myself with these stupid online calculators. I’ll go running with my dogs and my kid instead, thereby reducing my future healthcare costs by untold sums, decreasing my stress, strengthening my bond with my child and planting me in the present, a place that’s pretty great, even when it’s 100 degrees outside and the floors are hot under my feet and the dishes are piling up in the sink. We’ll save up for a dishwasher and central air, and we’ll start making a healthy yearly donation to UNICEF, for families who can’t.
Heather, you’ve already saved up more than enough money for a dishwasher, go out and treat yourself. They really do make an enormous positive difference to your life, much more than a marginal extra thousand dollars in savings ever will.