Now, don’t get me wrong, a retirement calculator can be useful, edifying and enlightening. It’s just that for a large majority of the population they can be a real downer. Let’s take a look at one that Bloomberg has online. (All firms have a variation of the same thing, I just chose one randomly). The example they show when you go to their site is that of a 25 year old with $5,000 in savings and a goal of 1 million dollars. To get to that goal will require that 25 year old to save an additional $6,129 per year for 40 years. OK, that is certainly reasonable (they use a supposition of a 6% return) and maybe even helpful. But the average 25 year old is about as likely to do that as he is to fly to the moon.
Of course to get a more realistic look is to make the numbers ever more daunting. Let’s say that a forty year old finally begins to look into his retirement planning situation and begins by plugging the following numbers into a financial calculator: $20,000 in current savings with a 1 million dollar goal. Well, this fictional fellow has to save over $16,000 per year to successfully accomplish that $1,000,000 level. Ugh. For everyone not in the upper echelon of income that is tough if not downright impossible. Needless to say, the savings numbers go higher and higher as the years tick by. On top of all that, even reaching the goal is not quite what it used to be. A million dollars is a lot of money even today, of course, but it hardly allows the type of retirement most people envision when they think about their future. After all, the income on $1 million will be lucky to generate $50,000 a year in today’s rate environment and probably much less if one is very conservative in their investments. And while that certainly averts poverty (assuming inflation is somewhat stable–not an easy assumption), it doesn’t conjure up thoughts of endless vacations on the beach.
The point is a retirement calculator is a decent tool, but not the be all end all. There is a reason to be aggressive with your investments when you are younger for example. That can change the calculations significantly. Another, might be that you are able to save much, much more after the kids grow older. The variables are many and a quick look at the mountain of savings (possibly) required will not tell the entire story. I am not saying to avert your eyes from the hard, cold truth, I am just saying it is not the whole truth. Keep your head down, save and invest as best as you can, and when you are ready, break out that retirement calculator. You may be pleasantly surprised how the numbers look a few years down the road.