Don't Make Retirement Planning For Two More Complicated Than Necessary
- Discover the fatal flaw hiding behind retirement calculators.
- The big picture is what matter. The details are a distraction.
- Scenario analysis can help you overcome planning hurdles.
This week in the Ask Todd section of my website, Kathleen wanted to know how to resolve the inherent challenge of using a single retirement calculator to handle retirement planning for two people.
Great question, Kathleen! I'm sure there are a lot of other couples who share this issue.
Before I answer this question, let me “set the table” for this discussion with some underlying beliefs I have about retirement planning that will color my answer.
I believe the most important thing about retirement planning is to pick a goal as soon as possible that's somewhere in the ballpark. Use any reasonable methodology available so you have a goal to start working toward today.
In other words, it's more important to start now than to delay the process to increase accuracy.
The earlier you start saving for retirement, the easier every financial goal will be to achieve. So just start now and clean up any inaccuracies later.
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Retirement Calculators Aren't Accurate
Assuming Kathleen already started and is asking this question to improve accuracy, my second belief will probably come as a surprise…
All retirement calculators are inherently inaccurate because they are based on (or require you to make) assumptions about the future which may (will likely) prove inaccurate.
It's a classic case of garbage-in equals garbage-out.
This is a fatal flaw to conventional retirement planning that overwhelms any inaccuracy you might introduce by incorrectly combining you and your husband's information into one retirement plan.
To elaborate on that last point, all retirement calculators require assumptions about investment return, life expectancy, inflation, etc. that nobody can possibly know with any degree of accuracy.
Related: 5 Financial Planning Mistakes That Cost You Big-Time (and what to do instead!) Explained in 5 Free Video Lessons
The way conventional retirement planning gets around this problem is to assume the past (average historical returns), guess about the future, randomize the past (some versions of Monte Carlo), or project the future from the past.
All of these solutions are riddled with potential inaccuracy.
The past is not the future, and the map is not the territory. It's an unavoidable problem with conventional retirement planning and all retirement calculators.
With that said, if you combine my beliefs about simplicity with the inherent inaccuracy of conventional retirement planning models, then the answer to your question is straightforward: do what works best for you because there is no “right” answer.
You can combine you and your husband's numbers into a net figure if you like that approach, or you can run two individual retirement planning scenarios (one for each of you), then add them together.
Frankly, I prefer the combined approach because I have a distinct preference for functional simplicity over unnecessary complexity. In fact, combining the data into one composite is the path I chose for my wife and I.
It’s worth noting that when I designed and programmed the original version of my Ultimate Retirement Calculator, it handled each spouse individually. While it worked perfectly, I scrapped it for the version you currently see. It uses combined numbers for spouses because properly separating all the information was just too complicated for most people to use.
After all, they call it community property for a reason.
Simple Retirement Planning Is More Than Accurate Enough
In other words, another belief I have is most people are better served by simple solutions they can actually implement instead of getting bogged down in complicated solutions. They may be more accurate, but they create obstacles to implementation.
I chose to make my Ultimate Retirement Calculator more simple and user friendly while accepting the small inaccuracy introduced. Flexibility and ease-of-use gives more value than pretending to have accuracy that doesn't exist in reality.
For example, one assumption retirement calculators require is a life expectancy estimate. You're supposed to tell the darn thing when you're going to die. Nobody knows the answer to this – it's insane! Sure, you can use life expectancy tables, but they're statistical aberrations that hold no validity for any one person's death.
You could get hit by a truck or have a heart attack this week. Alternatively, you might become famous and be the first human to live to 150. Nobody knows, yet the retirement calculator requires an answer to do its mythical calculation.
That's why I have no heartache in blending the life expectancy of both you and your husband. It doesn't materially change the accuracy of the calculation since it's all a guess anyway.
Use Scenario Analysis To Develop Your Retirement Plan
What I have found in working with financial coaching clients is there's something much more important to do with retirement calculators.
Most people mistakenly attempt to find their “number,” as if the answer to retirement planning was a single number for savings that would actually be accurate.
Let me clear any remaining confusion right now – it's not.
Your retirement number is nothing more than a mathematical projection of various assumptions that are impossible to make accurately. If your retirement future even remotely matches the output of your retirement calculator, then consider it random luck.
Don't believe in the apparent scientific accuracy of the calculator's output because it's just mindlessly crunching numbers based on a bunch of input assumptions that may prove totally false in the future.
I've found it far more instructive to brainstorm a wide ranging retirement scenario analysis with my financial coaching clients to begin modeling possible futures.
My suggestion when working with retirement calculators is to not quibble over decimal points or worry about which model is most accurate or how to combine spousal numbers. Instead, share a nice bottle of wine with your spouse and discuss all the possibilities and dreams you have for retirement. Then model these dreams using my Ultimate Retirement Calculator (which was designed just for that purpose).
What you'll find is changing the assumptions usually makes a dramatic difference in results; whereas the specific financial calculator chose or way you organize the data makes little difference.
For example, consider how some or all of the following questions can have a dramatic impact on your retirement planning numbers…
- How would your life and retirement plan be affected by the addition of some part-time business income?
- How does varying the inflation assumptions while keeping all other assumptions constant affect your financial plan?
- Suppose investments return far less than is commonly assumed? What happens if the return is higher?
- What happens if you work part-time for 10 years before retiring entirely?
- How would your retirement plan be affected if you received a big, fat inheritance? Or the inheritance you were expecting turns out to be zippo?
- What happens if you sell your house part way through retirement and move into a condo or motor home, thus banking the equity and lowering expenses?
- What happens if one or both of you lives to 80, 90, or 100 and beyond? How will your finances hold up?
I designed the Ultimate Retirement Calculator so you can run all of these scenarios and much more – in less than an hour.
Each of these changes will dramatically impact your financial results, and combining them in various ways can be a real eye opener that often changes how you plan your retirement.
When I go through this process with my financial coaching clients the results are usually eye-opening and clarifying. They begin to understand at an intuitive level how the retirement planning process works, the inherent limitations involved, and how to work around them.
They realize it's a blend of art and science because it's about life planning into an unknowable future: it's not just numbers.
Doing widely varied scenario analysis will give you a much better feel for your retirement security than focusing on decimal points and other technical issues.
In summary, I would encourage you to not sweat the details. Make it easy on yourself by using combined numbers to create one retirement plan.
Others may argue this approach introduces inaccuracies, but I say those inaccuracies are just rounding errors in the big picture.
Just take your combined numbers and work with the Ultimate Retirement Calculator to vary your retirement scenario. Try retiring at his age, then retire at yours. Try long lifespans and short ones and so on. You'll be able to see how each combination of assumptions affects the financial results.
What you'll learn is that retirement planning is all about the assumptions you use and not the calculator you plug the assumptions into.
In fact, I designed the Ultimate Retirement Calculator just so that you'd have the ability to complete sophisticated retirement scenario analysis – quickly, easily, and for free, because I think it's that valuable. I hope it helps you.
If you'd like to learn more, I encourage you to check out my book How Much Is Enough To Retire and my course teaching you how to design your wealth plan here.
Each of these educational products will walk you step by step through the various assumptions and models involved in retirement planning so that you can make an educated decision.
Thanks again for the great question, Kathleen. Hopefully it helped many other readers in the same situation.
Anybody can learn to build a secure retirement -- and you don't need a financial advisor.
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