The New York Times

January 27, 2007

O.K., Financial Planners, Grab a Calculator

and Let’s Get Started

by

Damon Darlin

The only way to know whether you have saved enough for retirement is, when you

suck in your last breath, for someone to show you your bank statement.

And you smile.

Until then, you’ll have to depend on financial planners and software.

In all the debate over whether Americans are saving too much or too little, there is

considerable agreement on a few things. For instance, it pays to start saving early

because the power of compounding, especially in a tax-free account, means you’ll

have more money later. The other advice that everyone gives the nod to is that you

need a plan and you need to revisit that plan every year.

Start with the calculators provided by a company that manages 401(k) plans and

individual retirement accounts. Fidelity discovered that just doing that is

intimidating for the majority of people. It created a really simple one called myPlan

Snapshot, which is available to anyone on the main page of

fidelity.com

. It asks five

simple questions that require no research or digging up old brokerage statements to

answer.

The result is a simple graph showing what you need and how close you are to

getting there. Then it offers to take you to a more sophisticated analysis, called

Retirement Quick Check, that requires about 30 minutes of effort.

Both of those calculators, like most offered by financial services companies, use

industry-accepted rules of thumbs to determine how much you need to save. “One of

the downfalls of an online calculator is they take middle-ground assumptions," said

Geoff Brooks, senior vice president for retirement services at

HSBC

, the financial

services company. So the advice is not finely tailored.

When you are comfortable with retirement planning, you need to take a step

further. The two hardest things for most people to figure out on their own is how

long they will live in retirement and how much risk they should take in their

retirement investments. The industry’s rule of thumb for determining longevity is

add two years to what your parent of the same sex lived, if, of course, that parent

died of a natural cause. But that rule needs to be stretched if you are fit and active

and dad was not (and not terribly helpful if your parents are still living).

“People are underestimating longevity consistently," by about five years on average,

Mr. Brooks said. “It is that kind of thing that undermines the planning."

Determining risk tolerance is important because, said Christopher Jones, chief

investment officer for Financial Engines, “if you take less risk, you need to save

more."

The retirement calculator at

FinancialEngines.com

, which costs $150 to use for a

full year, helps solve that problem. It runs what is called a Monte Carlo simulation

to give you an idea of what the risks are. You are presented with a series of

portfolios containing different kinds of investments and the probability of meeting

your retirement goals through each one.

For example, a rich person can afford to take less risk and could be in safe

government bonds like Treasury inflation-protected securities or TIPS. What does it

matter if a rich person’s money does not double in a decade; she’s already rich. But

a poor person has to take the higher risk of investing in stocks. He needs the money

and actually has less downside risk than he thinks. Why. He didn’t have that much

to lose. A well-designed program or a well-informed planner up on the latest

economic research can sort this out.

The research by Laurence J. Kotlikoff, a

Boston University

economics professor,

adds another dimension to retirement planning. He argues that most current

calculators overestimate the amount of savings needed because they rely on the

rules of thumb rather than an analysis of spending habits.

Mr. Kotlikoff’s ESPlanner software, which he sells for $150 at

esplanner.com

,

springs from that work. Like FinancialEngines, it requires considerable effort by

the user. It asks for a lot of financial details about investments, life insurance and

even your Social Security contributions.

When it has all the information, ESPlanner presents a series of graphs and charts

that offers recommendations. It also runs Monte Carlo simulations so you can

adjust the types of investments you make.

“Everyone is different," Mr. Kotlikoff said, “and the small ways they are different

makes a difference in how they plan to save and spend."