Have you ever entered an internet search for the term “simple retirement calculator?” If you have, your retirement plan may be in a lot of trouble.
I have looked at a good number of the retirement calculators available today on the internet. Most get the numbers wrong. Not a little bit wrong. Most get the numbers wildly wrong. It’s hard to believe. But it’s so.
The problem is easy to understand. There was a day when most investing experts believed in something called “the efficient market.” An efficient market is one that sets prices properly. Most of today’s simple retirement calculators assume an efficient market.
Unfortunately,. the theory on which these retirement planning tools are based has been discredited. Yale Professor Robert Shiller published research in 1981 showing that valuations affect long-term returns (that is, that the market is NOT efficient). Shiller’s research has been confirmed in numerous studies done in the time since. Even the big names have been expressing doubts about the Efficient Market Theory in scores of articles published since the onset of the stock crash in September 2008.
If the market is not efficient, then the simple retirement calculator that you used to plan your retirement steered you wrong. You had better look for a new simple retirement calculator and redo the plan.
The “Retirement Risk Evaluator,” a simple retirement calculator available at my web site, does the job. It does not report a single withdrawal rate as the withdrawal rate that is safe at all valuation levels. It is rooted in an understanding that the historical stock-return data shows that the valuation level that applies on the day a retirement begins is the single biggest factor affecting the long-term safety of that retirement.
The old calculators tell you that you can safely withdrawal 4 percent from a high-stock portfolio regardless of the valuation level that applies when your retirement begins. Not the Retirement Risk Evaluator. The new planning tool says that there are some valuation levels (extremely high ones) at which you can safely withdraw only 2 percent from your high-stock portfolio each year. And there are other valuation levels (extremely low ones) at which you can safely withdrawal as much as 9 percent from your high-stock portfolio each year.
If the idea that valuations affect long-term returns makes sense to you, don’t get burned by making use of one of the Old School retirement calculators. A simple retirement calculator is no good unless it is an accurate retirement calculator. Give the New School retirement planning tool, The Retirement Risk Evaluator, a spin.