Amerivest is Ameritrade’s new financial-advisor-in-a-box, which I’ll blog more about later. But first, I tried out their Simulator. I put in basically the same information that I used for my retirement nest-egg calculations – We want the equivalent income of $96,000 a year in retirement. Inflation is estimated at 3% annually. We’ll retire at age 60, and live for about another 30 years after that. I picked the most aggressive options for all the risk-tolerance questions. The answer? We need just a lump sum of $75,226.13 now to achieve our retirement goals. What?
Here is a screenshot of the final analysis:
$75k? We have that much money now. Ok, so that’s it. I’m done. No more writing. No more saving. Just gotta break even until I’m 60….
Doing some reverse-calculations, that means their software is assuming an 11.6% annualized return. Also, per the fine print “Impact of fees and taxes are not reflected.” Umm, so I’m retiring in fairyland? And what kind of super-ETF portfolio is supposed to give me 12% annualized returns?
This one:
(click to enlarge)
Is it just me, or does that sound really optimistic? Or maybe I’m really done?!
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Yes, that does sound very optomistic. I wonder if it is an advertising ploy. “Come to Ameritrade and you can retire on 75k!” Either way not accounting for fees in that calculation makes no sense. – Good post however!
It’s not how it works. I’ve had a real Ameritrade simulation that required significantly more…more of a true number. They had us set up for 80k a year in retirement and said we needed to save approx. 20k a year for 43 years to have a 99% chance of making it…so clearly there’s an error in that process or in the online simulator.
from the chart, you can tell it assumes
1) you have the same agressive allocation until 60
2) the market won’t fall a few years away from your target retirement
This’s one way to tell stupid people how (too) easy it takes to prepare for retirements. 12%? No, even 8% may be too much for the new ages.
I think the 10-12% that’s been the historical average of general stock market investments is really going to change in the “new age”.
For one thing, in decades past, the number of people who used the stock markets as investment vehicles was very low compared to today. Now, many more people (I assume based on the prevelence of fund management groups) are doing it. If you take the stance that stock markets are basically a pyramid scheme set-up, which I do, it stands to reason the returns will drop.
Historically, I’d say that happened during so-called market corrections. Certainly, some corrections have been steeper than most. I’d assume that in the “new ages” corrections will occur more frequently and result in lower average returns over the long haul.
That’s not to say that stock markets will not be a good investment choice. Rather, that other, better options may materialize to fill the void of “best” investment option.
The trick will be realizing those new options and capitalizing on them in a timely fashion. Any ideas on what they might be?
I never quite “get it” when people estimate their nest-eggs based off optimistic assumptions. It just strikes me as dangerously naive.
Perhaps I’m just Patty Pessimist here, but When I do my calcultations, I generally assume a 5-7% return, because when my retirement comes around, I’m certainly not going to be upset if I’ve only averaged an 8% return over the years. However, if I’m joining the trend of assuming 10% (or, in fairyland, 12%), I’m going to fall quite a bit short of my expectations.
There’s no reason why the “Prepare for the worst” platitude shouldn’t be applied to investing.
Cory,
I agree with you. I am almost always conservative in my estimates of future returns. I don’t think being cautious is the wrong way to go.
You’re probably A LOT closer than you think.
For example, why do you feel you need 96K/yr as a retiree? I mean, you already live conservatively/frugaly now. So you probabaly need less. An alternative excercise (which takes more time) but gives you a better estimate, is to do some research and find out what it how much money you would need _today_ to supply a 30 year retirement.
Compare yourself to others. If you’re savings are well above the mean (which they are!), you should be able to afford a decent retirement. At some level, it’s all relative…
You have no clue how to invest. You aren’t in real estate and all you are doing is investing in T-bills. Solid. Spend more time investing instead of relying on hokie money making schemes.
Lauren – did you use Amerivest for your number-cruncing, or another Ameritrade service? I would hope this simplistic program isn’t what you are paying for, even if it is pretty cheap. I mean, if people are going be using this it would seem they are putting a lot of trust into Ameriveset.
Yes the 96k is also being conservative. Interesting point about it being relative. Of course, it could also mean those who saved will simply be kicked off of Social Security.
shane – I fail to see why you keep reading this blog and repeatedly leave negative and unhelpful comments if you hate it so much. At least give me something better to work on than “spend more time investing”. =)
You know you are probably really close to being able to stop saving for retirement… if you wanted to. A simple calculation of $80,000 multiplied by 1.1 (10% anual return) to the 32 power gives you $1,583,533 by the time you turn 60 years of age.
$1.6 million in 32 years will be enough to last you quite a while.
If you changed to power to 37 for a retirement at age 65 you’d have roughly $2,550,296.
Dude, you’re close, I think Amerivest is right on the money… however, I also think it’d be dumb to stop saving but then again that’s like saying I think you should continue believing the sky is blue.
Oops, I said $80,000, my calculation used the $75,000 starting lump sum. $80,000 would yield even better results.
Brian,
don’t forget inflation. Let’s use 3.5% for that.
Starting with 80k, at 10% return, at age 32, until 65, dead at 85 = $42k per year in today’s dollars (assuming 15% tax bracket when you’re old).
The big if’s are avergage return and expected average inflation. To each his own on those guesses.
I use 3.5% inflation and 9% average return, and I think I’m an optimist.
-Wes
“Lauren – did you use Amerivest for your number-cruncing, or another Ameritrade service? I would hope this simplistic program isn’t what you are paying for, even if it is pretty cheap. I mean, if people are going be using this it would seem they are putting a lot of trust into Ameriveset.”
Not sure…we did more than just a number crunch of our retirement needs. However, I think our target numbers (the 20k a year) are actually relatively accurate for what we’ll need, if not a little too high. So I didn’t have a problem with it. If it had told me I didn’t need to keep saving, I would have had a problem with it!
So will you be better off by putting all the cash into retirement accounts (401k+ira) OR leaving the cash there for a house you may buy in the near future?
Hmm…
There are no reasons why you should not be investing in Roth IRA’s, even if saving up for a house. First of all, I would like to point out that you can withdraw from Roth IRA’s tax free for your first home purchase. Therefore, you have the double edge savings technique to save for both retirement and for your first house.
I can’t see that your 75K investment now would mean you could retire in 32 years for 30 years at 90K. I would have to agree, I’m a pessamist, and would not take such accounts as truth as to what the market will do.
Also, the thought comes is it really intelligent to invest all your money at once? What if we have a stock market crash and roughly everything falls on an average of 33 – 50%. (Think of Baby boomers, death, political problems, Iran/Iraq, Oil crises, way too many things to list) Then you can start saving to hope to make up to where you were. However if you invest over time (Unless you feel like we’re in a valley or don’t believe in business cycles) I would be more optimistic that sure – you may lose money now, but you don’t lose it all and you will continue to invest when the stock market is down, instead of now having invested everything into retirement, unable to pull it out for things like your House (unless you want huge losses which will do you nothing really but drain your retirement even more).
My thoughts are to invest some into retirement at high risk when young, hope for the big payoffs, because it will grow at higher gains; However, if you can afford it, invest into a home that you feel like you will be living in for the rest of your life. At the end of 30 years of mortgage, and you retire, you’ve invested in smaller amounts of your stocks (which may likely we’ll see a decline somewhere around 2008 – 2010). If you invested in your house and are able to keep it, when you retire you won’t be using that ‘fairy land’ 90K a year to pay 30-40K in mortgage for the next 15 years either. Instead you may retire with 60,000 a year, be in a lower tax bracket, still have some social security (If again you care to live in ‘fairy tale land’).
John, I enjoy reading your site consistantly and usually check it out once a night. Keep it up and let me enjoy seeing how another makes mistakes or come up with great idea’s. (Hey, if you make a mistake before me, All the better for me – if you can profit from something, so can I.)
As to Shane, “You aren’t in real estate and all you are doing is investing in T-bills. Solid. Spend more time investing instead of relying on hokie money making schemes.” What are you going to do when you buy your 300,000 dollar house now, that you don’t intend to live in for life, and in five years you have to sell it for 150,000 and still owe another 125,000? Houses can be just as risky as stocks, especially with the fact that people are having less families, and the baby boomers will all be retiring and selling homes.
You’re right, no security, no diversity, you can end up like those who invested only in Enron. I would have to say his techniques and ideas at the “hokie money making schemes.” are and actually can be pulled off easily enough with a true return you don’t have to worry about any risk. When you get something for free, and invest it securely, it is not stupidity. It is much safer than if he were to invest his own money in the stocks, it may not net the same results, but he will only compound the results by doing both. Any good trader, any decent investor will tell you – You can do all the studing in the world, but you can not see everything, and sometimes when you do see it, so does everyone else and you can’t jump out of the way, because no one is willing to take your place.
I really should have added a 😉 smiley at the end of my post to indicate that I have no actual plans to stop saving money. =D
Eric, income in Roth used for downpayment is TAXABLE, not tax free. You just don’t pay the 10% withdrawal penalty. Otherwise, everybody would do that. The principal of Roth you can withdraw tax free at any time, so that doesn’t matter.
Here is a trade-off, cash out your Roth to pay for your overvalued house and pay taxes, or wait until 60 and get your income tax free? tough choice 😛
12% annualized returns :O I would like to know how. 12% IMO is waaay too optimistic even for economies like India
I can’t speak for anyone other than myself, but I have done at least 10% every year for 3 years in my retirement accountants. So I think that average does work well.
11% is very aggressive – you have to choose a particular historical period (1984-present) to get your average returns near there for a simplified mix of 90% S&P 500 and 10% t-bills. If you do that, the standard deviation of returns is a whopping 15%.
So if we assume that distribution of returns and simulate the possible range of outcomes based on 75k in capital, I get that you’ll retire with $2.3m PLUS OR MINUS $1.9m (that’s 1 standard deviation, so there’s a very good chance – about 1 in 3 or 4 – that you’ll retire broke!) This translates to income of $75k/yr plus or minus $66k.
Of course this is without fees, taxes, or changing your risk tolerances as you get older, consistent with Ameritrade’s methodology.
I don’t know about you but my risk tolerance for retiring broke isn’t quite that high…
“Qualified first-time homebuyer distributions” from a Roth IRA is indeed not subject to tax or penalty. On the other hand, the same qualified distributions from a traditional IRA is subject to tax but is penalty-free.
However, there is a lifetime cap of $10,000 per individual on such qualified first-time homebuyer distributions, which I believe is the primary reason why not everyone is doing this.
See IRS Publication 590 or this IRS Roth IRA distribution flowchart
Wow, a lot of feed back on this post!
Although I’m late, I thought I’d add my $0.02…
My *ultimate* retirements goal is to retire while living off income yeilding investments that will not erode my nest egg for 2 reasons…
1) you may live a heck of a lot longer than you think
2) why not leave something for the kiddies (or grand children)
I think their simulator is being overly optimistic…but don’t worry, social security will bail you out! 😛
What a fun conversation! And such well regarding bloggers at that!
Jonathan, I’m glad you thought of smileys. There’s just far too much unpredicatability to make that kind of gamble.
I’m curious, what have your other simulators shown you. You use Quicken, don’t you? Have you tried the life event planner in Quicken?
It’s a bit kludgy, but eventually pulls a study of what you need to save. It also factors in life events, such as having children, marrying them off, etc….
I rather like it. It’s a bit flakey but gives you a good idea.
My goal is about $120k spending on retirement. It tells me I need to save up about $4m over the next 30 years to reach that goal. Also, I need to keep saving despite a decent nest egg alread built. Of course I’m using very conservative numbers >>
8% growth pre-retirement
4% growth post-retirement
Whatever’s left over will be put in trusts for grandchildren’s education.
And if I have enough left over I’m going to build my own Zepplin!!
Good luck.