Saturday, December 09, 2006

Retirement Calculator Evaluation - A.G. Edwards

Over the next month, I will be testing several online retirement calculators and posting my evaluation.

Here’s an assessment of a Nest Egg Score Estimator from A.G. Edwards. It provides a rating for your retirement readiness. Overall, the tool covers the right categories, but it seemed a little too “feel good.” I thought their system was a little too generous in the scores it assigns for each answer and it didn’t include possible answers such as “negative net worth” for question 13 or questions about existing non-mortgage debt.

To illustrate the point, let’s take a hypothetical person, Ima Retiring who is:

1. Married
2. 55 years old
3. With dependent children
4. $105,000 income
5. 10+ years at the job
6. Has a retirement account
7. Saves over 20% of income
8. Saving more this year
9. Taking more risk with investments
10. Retire within 5 years
11. Spending 80% of income
12. 50% equity in house
13. Over a million dollars in net worth.

Ima’s score was 835 or Excellent. I thought this was a reasonable rating.

For curiosity, I tried a couple of changes that I believe are “killer issues” to a comfortable retirement. In question 11 (the percentage of take-home pay spent), a change from “spending less than 80%” to “spending over 100%” only decreased the score by 40 points and Ima remained in the Excellent category. Similarly, a single change of $1,000,000 net worth to $0 net worth reduced the score by 80 points, still barely keeping Ima in the Excellent category.

My assessment is that either change should have reduced Ima’s rating to Fair, or borderline Fair/Good. I must be too conservative when it comes to retirement readiness:-)

Disclaimer: Examples are illustrative purposes only. Your results will vary with different inputs and assumptions. As with all retirement calculators, please consult with your financial advisor before taking any actions.

Photo Credit: morgueFile.com, Mary A. Pen

This is not financial or retirement advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC

3 comments:

Dimes said...

I hate this calculator because it discriminates against the young. I can barely eke out a score in the bottom of the "good" category, even if I fudge some of the answers. But we're young, fairly low-income, and have only been saving for 2 years! I think compared to other people at our age and income level, we're doing very well!

Golbguru said...

Yet another case of calculations that can mislead :). I glossed over, Fidelity's calculator today...you did A.G Edwards...there is Nationwide's calculator remaining, let's check out that too. :)
May be we can combine some posts on retirement calculators.

Super Saver said...

Dimes,

Thanks for your comment and identifying a different issue with this calculator.

Based on your comment, I checked the sensitivities of a few of the non-financial question – e.g. age, years to retirement, and dependent children. Much to my surprise, changes in these questions had no impact on the rating score. As you point out, younger people have more time and therefore, can have fewer assets and still be doing very well in working toward retirement.

I will do an updated evaluation of this calculator. It seems the rating may be too “stingy” for people in the early phases of their careers.

GolbGuru,

Great post on the Fidelity calculator. I will take a look at the Nationwide calculator this weekend.

Among others, I also plan to evaluate the one from Vanguard.