I was watching TV this weekend and kept seeing commercials about ING’s Your Number, which is an online calculator that supposedly helps you plan for retirement by telling you how much you need to save. Here’s one of them if you haven’t heard of them before:
After trying it out and finding out my 7-digit number, I wanted to see what was “under the hood”. Monte carlo simulations? Spits out random number to mess with your head? Maybe my Google-Fu is weak, but I couldn’t find anything except this Your Number worksheet [PDF] from ING dated 2009. The final numbers don’t match up, but it does provide some insight into how the current calculator works. Using this information and trying lots of permutations, I tried to backtrack how each question affects the final output.
Factors and Assumptions
Current age. This factor appears to be used solely to calculate how many years you have left until retirement. Since the ING Your Number is the amount of money you need at the time of retirement, it increases every year with inflation. This is an important fact to note, as needing $1 million today would be the same as needing $2 million 30 years from now due to inflation alone. (Inflation is assumed to be roughly 3% annually.)
Marital status. The calculator says “We’re not trying to pry into your personal life, but whether or not your married has an impact on your number.” Nosy or not, it actually doesn’t seem to matter. I tried all kinds of inputs, but I couldn’t find any that changed based on being married or not. Let me know if I missed something here.
Current household income. At first glance, you’d think your current household income wouldn’t affect Your Number necessarily, since it later on asks for the actual income required during retirement. I noticed that making slight changes in your current income doesn’t affect Your Number at all. However, large changes do – it appears that this number is used to estimate future social security benefits. If your current income is really low, then your future benefits will also be low, which increases Your Number.
Age at retirement. This factor is used twice – once along with your current age to find how long you have until retirement, and again with your death age to find years in retirement. The more years you plan to spend in retirement, the greater Your Number will need to be in order to maintain a margin of safety.
Annual income required during retirement. A recommended amount is 80% of your pre-retirement income, but I hate that rule-of-thumb. Instead, this is probably the hardest part of the calculator because it requires the most personal and in-depth thought. Is your house paid off and are you going to stay in it? How much of your current income goes towards work expenses? What activities do you plan to do in retirement?
Provide income through what age? As noted above, this “death age” is used to calculate the amount of years you’ll spend in retirement. I kind of wish they just assumed 100 or something for this, it seems a bit morbid to guess when you’ll die.
In the end, Your Number is essentially your annual retirement income multiplied by a factor ranging from 5 to 30, depending on how long your retirement horizon is. It could have just told people to multiply by 25 and be just as accurate (or inaccurate) . As you might expect with any calculator that tries to help plan your retirement by asking five questions, Your Number is mostly a marketing gimmick designed to connect you with ING-affiliated financial advisors and insurance salesmen. That doesn’t mean you still don’t want to try it, though, right? 🙂
What’s yours?
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I prefer the simple 3% drawdown rule, and actually wrote about this today:
http://www.thisux.com/2010/09/13/financial-independence/
It just generates a big number to scare people off. Most think they have no chance to reach that number, so they give up instead.
I agree with the previous poster regarding generating a number that scared people off. I calculated “my number” to be less than yours. I think that just having “a number” without taking into consideration what your investment mix actually consists of is not a very smart strategy.
For example a $100,000 investment in a dividend growth stock portfolio which yields 4% today but grows distributions at 7% per annum could generate $16,000 in annual income 20 years from now.
Those $100,000 invested in a 30 year Treasury Bond would generate $3,900 for 30 years in a row..
Just some food for thought…
You pretty much hit the nail on the head when you said: It could have just told people to multiply by 25 and be just as accurate (or inaccurate).
Most people probably can’t work out the details for themselves, so this is as good as it gets for them.
Re the responses above about a large number scaring people off: I seriously doubt that this is their intent. They want to scare people just enough that they come in and ask for help.
Personally, I have run my own numbers in great detail, and I have found that the “Multiply by 25” or “You can take out 4%” theories work pretty well. (I intend to retire at 50, or at least be able to.) So – if I need $100K per year, I need $2.5 million stashed.
Worthless info. Just an add campaign for a TBTF bank.
Wow! My number is way lower than yours. However, I think I’d like to have your number saved up than the number I got.
Wow, inflation definitely is messing with my number. I’m 23, if I want to retire at age 65 and live to 100 my number is about $4,000,000…
@Matt – 3% drawdown is the same as multiplying by 33. 4% drawdown is same as multiplying by 25. Either one will give you a rough number.
My number was $9.2M to replace current salary in 35 years – guess it’s cat food for me.
@Courtney – Ha, with those numbers you’re probably making 100k a year now – not quite cat food time if you fall short. 🙂
Weird… my number goes UP the more I delay retirement. So I’ll need $3.2 mil if I retire at 50, or $3.3 mil if I retire at 55.
Maybe I should quit now while I’m ahead!
All else being equal, my number increases with my input for retirement age. Shouldn’t less money be required for a later retirement and more be required for an early retirement???
@ Jonathan – Haha, yeah I was being a little sarcastic with the cat food. But I was trying to convey something more along the lines of Eric, Alex and bb about the “big scary number.” The fact is, for people in their (late) 20s like me, trying to come up with a number is pretty worthless – we have no idea what inflation, market returns, taxes, social security, etc is going to do so any formula is really just a wild guess. Right now we’re just doing “as much as we can” and we’ll refine later. We’re middle to upper-middle class I guess, and the idea of needing to save almost $10M to keep up with inflation is pretty crazy to me!
@Jim, Sean – That’s because the number keeps getting adjusted for inflation, and is the amount you need to have saved on the date that you retire. So if you retire later, you need more money simply due to inflation.
In my opinion, it should tell you Your Number in today’s dollars to avoid such confusion.
Not usually one to plug my blog, but I created an infinite retirement calculator a few weeks ago. It works best in my spreadsheet, where it tells me when I am projected to have enough saved up to retire with my current inflation-adjusted income. The Javascript version is slightly harder to utilize, I think, but maybe it will help someone a bit? http://eis271828.blogspot.com/2010/08/infinite-retirement-calculator.html
I guess i need to reconsider my career choice. 😉 I will need 3 million if i can make it to 100 years old. I guess if I live that long my adult diaper costs will eat the bulk of my savings. :-p It is a good plan to start a plan, revise your plan, or add a little cushion to the plan you have in place to ensure your financial future.
These simple retirement calculators are the marketing rage among the financial companies. Fidelity has myPlan and BOA has one too. I would guess they probably all have one. They all create some scary numbers which has always been my issue with them. Frankly, they weren’t created for this crowd who can handle the number. They were created for the crowd that will dedicate 20 seconds this year to retirement planning. But they see that number and stick their head in the sand anyway.