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We All Want an A

Jonathan Clements

IN THE WEEKS BEFORE my annual physical, I made a concerted effort to lose a few pounds, drink more water, skip my evening glass of wine, eat more fiber, and avoid red meat, French fries and cheese. The happy result: My blood pressure was low. My weight was down slightly from my previous checkup. My cholesterol count was good. My A1C level suggests my prediabetic condition hasn’t got any worse. All in all, last month’s physical found that I had little reason to worry.

The reality: While my exercise habits are excellent, my eating habits leave something to be desired. But I’m not anxious to discuss this reality with my doctor, hence my pre-checkup regimen. I don’t want a lecture. Instead, I just want the doctor to tell me everything is fine.

That brings me to the response to HumbleDollar’s Two-Minute Checkup, which was launched earlier this month. From the emails I’ve received and from the comments I’ve read, both on this site and elsewhere, many folks found the feedback they got from the calculator helpful. But not everybody liked their results.

The Two-Minute Checkup is designed to analyze a user’s financial life based on minimal information—the sort of stuff each of us typically knows off the top of our head. Based on no more than nine inputs, the calculator offers suggestions on 10 financial topics. I like to think the Two-Minute Checkup is unique, but the financial logic underpinning it is pretty conventional. You can get more details here.

If the calculator’s logic isn’t the problem, what is? After sifting through the comments and emails, it seems many of the calculator’s critics are bothered that they can’t input the value of their Social Security, their pension and their home. That, in turn, is driving two key sets of complaints:

  • Some folks still in the workforce aren’t happy with the gauge of their financial fitness and with the suggested retirement savings rate.
  • Some retirees aren’t happy with the calculator’s spending feedback.

Needless to say, some of the complaints are valid. But they also say a lot about human nature.

For those in the workforce, the Checkup gauges their financial fitness by looking at whether they’re on track to save 12 times their annual salary or wages by age 65. If their portfolio is that large, it should be able to sustain retirement withdrawals equal to half of their old salary.

But amassing 12 times income is a tough target to hit, and most folks don’t have anywhere near that much saved by the time they retire. In fact, according to a 2015 study by the National Institute on Retirement Security, 60% of those close to retirement age have a net worth equal to less than four times their income. Moreover, the study’s authors describe their definition of net worth as “generous,” in part because it includes home equity.

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Why doesn’t the Two-Minute Checkup ask about home equity? For starters, it’s a number folks may not know off the top of their head and, even if they think they do, there’s a good chance their estimate is wrong. More important, a home isn’t easily turned into a retirement income stream. Many retirees are reluctant to downsize or take out a reverse mortgage and, even if they take those steps, they’ll only be able to spend a portion of their home equity. Yet, from the comments and emails I’ve received, it seems some users would like their home equity to count toward their financial fitness—because it would make their finances look better.

What about pension income? Even if workers are entitled to a pension, they may be uncertain how much they’ll ultimately receive because they’re still accruing pension credits, so this is another number they won’t know off the top of their head. Still, if you’re eligible for a pension, you’ll be in better shape than the financial fitness gauge suggests, and that caveat is built into the feedback that the calculator delivers.

What if you’re retired? At that point, you will indeed know how much your pension pays, as well as how much you’re receiving from Social Security. Suppose you’re a retiree age 51 or older with $350,000 in your financial accounts. Here’s the spending feedback that the calculator would give you:

Based on your total savings, you should probably limit this year’s total portfolio withdrawal to between $14,000 and $17,500. If you have other income from, say, an annuity, part-time work, a pension, rental properties or Social Security, that could provide additional spending money.

This is when I really started scratching my head. If folks are receiving a pension or Social Security, they know how much they’re getting from these two sources. But it seems some retirees still want to input that information into the Two-Minute Checkup, so it’s then repeated back to them. Obviously, the calculator wouldn’t be telling them anything they didn’t already know. So why do they want this information included? Yes, it would make the calculator’s feedback more comprehensive. But I suspect it would also make some retirees feel better about their finances—because their retirement savings are on the skimpy side.

I’m not interested in unnecessarily feeding folks’ financial worries. Far from it. That, in part, is why I’m paying close attention to user comments, with an eye to improving the Two-Minute Checkup. I’d like to find some way to incorporate information on Social Security and pension income without getting away from the calculator’s original objective, which is to provide feedback across a user’s entire financial life based on minimal input.

But while I don’t want folks to feel badly about their finances, I also don’t want the calculator to give them false reassurance. Yes, your home may be valuable, but it typically shouldn’t count as part of your retirement savings. Yes, Social Security is a wonderful income stream, but it isn’t enough for a comfortable retirement. Yes, receiving a pension is great. But if you don’t have a pension or your pension isn’t all that generous, aiming to save 12 times income is a worthy goal.

My hunch: The users who like the Two-Minute Checkup are being told they’re in good financial shape, while some of those who are unhappy with the calculator don’t like their results. I get it. Nobody likes critical feedback. We all hate those annual employee reviews. We don’t like it when our spouse comments on our driving. Like me when I go for my annual physical, we just want to be told everything is fine.

But if we’re to improve, we need to keep an open mind. Haven’t yet tried the Checkup? Give it a whirl—but don’t expect to get an A.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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none known
none known
3 months ago

My problem with the calculator is the assumption about how much of my income I need to replace. Since I currently live on ~30%, the calculated values are useless. I should have the option to specify a replacement percentage if I want to and use the default if I don’t.

CJ
CJ
3 months ago

I like the calculator & don’t mind SSI exclusions. I am uncomfortable counting SS anyway. How can I count on something those in power have the ability to legislate away?

I am concerned that shortfalls will be covered by pandering politicians who see more means testing as an easy, justifiable band aid. Punish savers who also paid into the program so we can bail out spenders who lived big & now demand more help.

I hope for the best, but plan for the worst.

I don’t have kids to shack up with. And cat food is a lot more expensive these days. lol.

AKROGER SHOPPER
AKROGER SHOPPER
3 months ago

Jonathan another exceptional post plus the bonus of a calculator for us all. After 55 and retirement, I have avoided any contact with medical check ups since 2010 to keep stress low. No worries about billing errors, waiting with sick patients, or post diet alterations like you participate in. I hope your doctor knows what he is doing and is able to keep you around as everyone on board looks forward to your wisdom.

Marla Mccune
Marla Mccune
3 months ago

This calculator is great! Thanks!

parkslope
parkslope
3 months ago

I think this is an excellent tool. As you noted, it is impossible to develop a quick financial checkup that is applicable to everyone’s situation.

One concern that does come to mind is that folks who get an A might feel less need to delay claiming SS. Clearly, someone who just meets the threshold for an A who claims at 62 will have significantly less income in retirement than someone who claims at 70. Thinking about this made me wonder if you could estimate SS benefits at FRA based on the combination of income and age and incorporate that into your checkup.

Last edited 3 months ago by parkslope
Jonathan Clements
Admin
Jonathan Clements
3 months ago
Reply to  parkslope

The Social Security website does that here:

https://www.ssa.gov/OACT/quickcalc/

I’m not sure how predictive a single year’s income is, but I assume the Social Security Administration believe it’s a reasonably reliable guide.

dave70128
dave70128
3 months ago

Hi Jonathon: I just read today’s article and I understand that people (myself included) don’t like negative feedback. I tried the Two Minute Checkup about a week ago and thought it was very useful. It even clued me into a couple of things (like how to pay for long term care) that I have never seriously thought about.

John Podsedly
John Podsedly
3 months ago

Re: Your lede topic … Changing your diet so you pass the physical exam — isn’t that like slowing down on the freeway just because you see a police car waiting up ahead? I am a fellow prediabetic and avid exerciser, with an upcoming physical, determined to adopt some healthful habits, maybe even some that will be maintained. (And I suspect we both obey speed limits, within reason.)

As for the Checkup, I found it very useful and encouraging, but then I consider Humble Dollar itself a daily checkup.

Jack Hannam
Jack Hannam
3 months ago

I like your calculator as a tool for what it is intended, and have asked my adult sons to try it. I think a more important feature, which you have described clearly, is the distribution strategy.

There is no shortage of articles which discuss the “4% rule”, and its numerous variations. What they all have in common is that after year one, future withdrawals are no longer tied to the portfolio amount. You get smooth and predictable cash flow, but the cost is that asset price volatility poses a direct risk to portfolio survival. And nearly all other calculators assume either annuitizing your nest egg or following a 4% rule, once retired.

Your strategy instead is based on annual portfolio valuations, and it transfers the risk of asset price volatility away from the portfolio to you, in the form of a more volatile annual cash flow. If you have the flexibility to deal with variable cash flow, this strategy seems superior. And, it may influence you to hold comparatively larger amounts of stocks than you might if following a 4% rule or some variation of it.

Willene Jaqua McRae
Willene Jaqua McRae
3 months ago

Appreciate the check up. And huge appreciation to Jonathan Clements and all of the folks who contribute articles…an amazing service. I don’t have the financial education most of the the people who post here do. All of my education has happened through Humble Dollar. Just want to say that the check up was great for us (retiring December 2022). Easy for us to think about the additional assets we have, not covered in the check up. Don’t mind at all not getting an “A” with this calculator. Instead, grateful to do a quick overview and we have more finely tuned analysis via Fidelity. BUT ALSO, had our 29 year old use it. Huge impact on her…super wonderful as it helps her to feel even more motivated to save. She will thank you 30 years from now! I hate posting on the internet, but really wanted to put in a word for how much good Humble Dollar does for us regular folks and the upcoming generation. We will send a donation every year! Thank you thank you.

Jonathan Clements
Admin
Jonathan Clements
3 months ago

Thanks for posting. I’m so glad you — and your daughter — found the Checkup helpful!

mytimetotravel
mytimetotravel
3 months ago

This is obviously more useful for someone who has not yet retired, all it did for me was calculate a 4-5% withdrawal rate. For a pre-retiree I have the same comment I made on another recent article on retirement: what counts is the amount you are spending, not the amount you are earning. I believe some people actually spend above their income, but others spend well below. After I paid off my mortgage, stopped saving for retirement and dropped to a lower tax bracket my expenses were nowhere near my final year salary. Twenty-two years later they still aren’t.

It might be helpful to point users towards more sophisticated calculators if they want to pursue the matter.

Jon Daley
Jon Daley
3 months ago
Reply to  mytimetotravel

Yes, I’ve been frustrated with lots of calculators because my income went up significantly this year (150% increase) and will likely stay that way until I retire. But I have no plans to really change my spending anywhere near that amount, and even at my old salary, we didn’t spend it all.

We happily live on $60k or so regardless of income.

Jonathan Clements
Admin
Jonathan Clements
3 months ago
Reply to  Jon Daley

If you want to “fool” the Two-Minute Checkup to reflect your unusual situation, try this: In the place where you input salary, simply input double the amount that you want your portfolio to generate each year in retirement. For instance, if you want $40,000 from your portfolio, insert $80,000 as your salary.

Jack Hannam
Jack Hannam
3 months ago
Reply to  mytimetotravel

I agree with you that total annual spending, including taxes, is the more useful number for planning purposes. For those still working and investing for retirement, the calculator gives a quick estimate of how they are doing. This is of particular value to those who are not yet regular readers of HD or related sources, but may wonder from time to time whether they are at least on track.

Nate Allen
Nate Allen
3 months ago

The Two-Minute Checkup seems to do exactly what it’s name implies: give a quick financial checkup with the most pertinent information.

If people want a more comprehensive checkup with more information included, there are plenty of places to get that. Perhaps some people are looking for a 20-Minute or Hour-Long Checkup?

B Carr
B Carr
3 months ago

I like the calculator as a quick starting place for [particularly] folks with little financial acumen.

Oh, and I got an A+++ (spending is far, far below what was suggested by the calculator).

🙂

James McGlynn CFA RICP®
James McGlynn CFA RICP®
3 months ago

Looking at retirement income isn’t the same as overall financial well-being. Someone who has a paid-off mortgage looks worse than someone with a mortgage with cash put aside. Someone with a pension is different than someone with a 401k and no pension. I think the tool is great for savers on the way up. (I do think the pre-check dietary change is a good topic to explore. We all know about 4 things to eliminate to lose the 5 pounds- (For me)-chips, alcohol, ice cream and nuts. Glad your doctor gave you a clean bill of health!

David Shapiro
David Shapiro
3 months ago

Resistance to excluding home equity from retirement calculations might stem from feeling that it should be included in one’s net worth. It should be included in one’s current net worth for the purpose of calculating what your heirs would inherit should you (and spouse) die today, and to feel good about the wealth that one has amassed to date (as Mr. Clements suspects), but that figure is not directly translatable into the amount of assets that are likely to be usable to fund one’s retirement in the future.

SanLouisKid
SanLouisKid
3 months ago

I started simplified “projections” thirty+ years ago and found I needed to update them every five years or so. I usually underestimated my numbers. Since you can’t estimate with 100% accuracy over long (or short for that matter) time periods it seems better to err on the side of caution. What Buffett would call a “margin of safety”. I think the Two-Minute Checkup is a good starting point. It would be impossible to get detailed results from limited input, but most people won’t take the time or do the work to come up with complete information.

Supplemental: Quicken does have a planning section. It can be so detailed that it’s somewhat off-putting. That’s the big plus of the Two-Minute Checkup.

Last edited 3 months ago by SanLouisKid
DrLefty
DrLefty
3 months ago

First of all, I loved the opening about your physical. It’s amazing/annoying that I can be so good about exercise, but that it doesn’t automatically translate to my eating habits. Separate set of skills and disciplines.

I’m a professor, so “don’t expect an A” also resonates with me, but—if I gave my students a grade but overlooked some of the work they’d done when I did the calculations, they’d be pretty upset with me. My husband and I have both spent decades in state service. He retired from his state job in 2016 after 20 years, draws a pension, and now works in the private sector. When I retire in three years or so, because of my long service record, I’ll be entitled to a pension of close to 90% of my final salary. Both of the pensions will have COLAs and survivor benefits. There are also excellent health benefits attached to our state retirements.

These pensions are not a small thing, and they’ve been a huge part of our retirement planning since we got our state jobs in our 30s. We also max out three retirement accounts (two 401Ks and a 403b) and have a nice nest egg, but it’s nowhere near 12x our current income, which is high. But we’re not worried in the slightest about retirement and don’t expect to touch our savings until we have to (RMDs at 72 or 75 or whatever it is by then). We plan to delay filing for Social Security until we are 70. We have no debt except for a very manageable mortgage payment and have mapped out a pretty good estimate of what our monthly spending needs are now and will be in retirement.

So when I ran your calculator, it said that we’d need to save over $2 mil a year to reach our “goal” (12x our current income, minus our savings). That’s not even getting a “C” on our checkup. That feels like an “F.” But it’s completely disconnected from our reality. This is what I mean by the analogy of my students being upset if I didn’t count some of their work when I calculate their final (or midterm) grade.

I understand that a “two-minute” calculator based on answers you can give off the top of your head isn’t going to cover everyone’s individual situation. I also understand that these days, a couple with two generous defined benefit pensions isn’t typical (actually it will be three because even his current job will pay a small pension when the time comes). So I appreciate what you did here, but if I were your student, I’d complain about my “grade”!

Greg
Greg
3 months ago

My wife and I are both retired, no debt, house paid for. Calculator was spot on for our “simple” situation. It reflected what I’d worked out for us on my own. Good job.

R Quinn
R Quinn
3 months ago

I think the Checkup is a fine tool for the purpose intended. It’s simple, easy to use and gives the user something to think about. Some HD readers forget their level of planning sophistication may be above the average. Trust me, I view many blogs each day and what people don’t know or think they know is quite amazing.

Having said that, here’s my feedback regarding those already retired.

The feedback from the Checkup is oriented toward those not retired and an assumption that investments will provide the bulk of retirement income – I think – which of course is valid in most cases.

As Jonathan points out, if there is a pension, spending advice may be different. That’s somewhat helpful, but quite vague. Say you have a pension and Social Security and no need at all to drawdown from investments. Savings may appear on the skimpy side, but that may not be the case based on total income from other sources.

Maybe just tweaking the wording a bit would help when “retired” is entered such as “your spending from investments will depend upon the portion of expenses covered by your other retirement income.”

Last edited 3 months ago by R Quinn
Jeff Long
Jeff Long
3 months ago

I was a CPA for 40 years, and have been told I should write a book; I saw the side of people few will ever see, and a lot of other interesting stuff. People are spenders or savers. At the most basic level, finances are simple: if you spend more than you save, you have a problem. Spin the data any way you wish, but that won’t change the facts. Why is the drain line in a plumbing system larger than the supply lines? I like the Checkup because it requires a minimal amount of information people should know. My results didn’t tell me anything I didn’t already know, but I agree with all of them. Thanks for your insight and all you do, Jonathan.

Chazooo
Chazooo
3 months ago

Don’t recall it mentioned, but many current workers will not recieve defined benefit pensions, and of course the prospect of ending SS that has been on the table as long as I can remember, so the structure and goal of Mr. Clements’ Calculator make perfect sense.

Scrooge_McDuck88
Scrooge_McDuck88
3 months ago

I guess there’s people who hope to answer 5 questions and get deep personal insights into their financial situation both at the present and in the future…

Edmund Marsh
Edmund Marsh
3 months ago

Yes, it’s difficult to submit to the honesty of an objective appraisal, whether from our doctor or a calculator like your Checkup, but the consequences of not doing so can be even more difficult.

Cammer Michael
Cammer Michael
3 months ago

Would you please clarify whether data entered into the calculator is for an individual or for a couple who plan to be together through retirement? For instance, when you ask about savings, do you mean my savings or our aggregate savings? Should we be doing this as two individuals or as one çouple unit?

Jonathan Clements
Admin
Jonathan Clements
3 months ago
Reply to  Cammer Michael

The “all financial accounts” figure should be for both of you.

Cammer Michael
Cammer Michael
3 months ago

Thank you. This gets a lot closer to A.

This considers that living expenses are far less for groups who share the same domecile.

Also, apologies for asking 2nd time. I now see you answered my question last week.

Jeff Vinick
Jeff Vinick
3 months ago

Love your blog, not your calculator. 12x salary is a flawed amount because I save over 50% of my salary monthly and we live below our means. I have about 35-40x what my annual spending will be in retirement. A more accurate number to guage retirement readiness. I’ve always had problems with retirement calculators that based results off of salary. If my salary is cut in half, suddenly I’m retirement ready based on my savings. The calculator penalizes big savers. Sorry, not a fan.

baldscreen
baldscreen
3 months ago
Reply to  Jeff Vinick

We are in this same situation, and I found the same kind of results when I used the calculator. I know you can’t be everything to everyone.

Jonathan Clements
Admin
Jonathan Clements
3 months ago
Reply to  baldscreen

While I’m sure you have a good handle on your cost of living, I strongly suspect that many folks would underestimate their likely retirement expenses because they’d forget about taxes and they’d downplay out-of-the-ordinary expenses, like medical bills and home repairs. Rather like asking folks to tell you their home’s value or their risk tolerance, I’m not sure you’d get good answers from most people if you asked them to tell you their future annual cost of living off the top of their head.

Jonathan Clements
Admin
Jonathan Clements
3 months ago
Reply to  Jeff Vinick

If you’ve thought it through and calculated that 12 times salary is the wrong target for you, I think that’s great. Still, with a savings rate of more than 50%, I suspect you’ll hit 12 times salary soon enough. Most folks, of course, aren’t saving anything like 50% of income — and aren’t, alas, giving their finances serious thought. For those folks, I’d contend the Two-Minute Calculator is a great starting point. And for those who are more diligent about their finances, I think it’s a chance to think about their finances anew and make sure they’re on track.

Ormode
Ormode
3 months ago

Yes, it certainly doesn’t apply to true financial mutants. I hit a 60% savings rate while working, living on 20% and paying 20% in tax, and as a retiree I have continued to be a net saver.
Supersavers don’t have to worry about having enough money. They need to worry about lowering their taxable income so they don’t have to pay so much IRMAA and NII. If you have 40, 60, or 100 times your final salary in financial assets, taxes will be your main problem.

Michael1
Michael1
3 months ago

In my view, there’s no need to modify the tool to incorporate things like social security or other income.

I had a similar first reaction as some others about not being able to input these, as the picture seemed incomplete without it. But on reflection, I don’t think this is a problem.

The intent is for this tool to be used with data that’s top of mind, and unless you’re already receiving them, things like pension and SS amounts usually aren’t. Asking for these inputs leads people to guess, which reduces the value of the output. (If you want to collect your numbers and get more granularity, and you should, there are plenty of calculators that do this.)

The tool is helpful in suggesting quickly and simply what you can pull from your portfolio, which is the number many people need help with. If you want to include other income in your own calculation of this, then it’s easy offset the “spending from portfolio” advice with those numbers when you have them (maybe even in your head if you know them already).

The additional pieces of advice the tool gives would be minimally impacted by the additional inputs.

Thanks Jonathan and Sanjib!

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