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.

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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