A reader sent me a link to a tool published by ING. Ingyournumber.com asks for six simple inputs and spits out, with clever animation, your “number,” that is, the dollar amount you will need at the start of retirement.
The six inputs are your current age, martial status, current income, planned age of retirement, desired annual retirement income, and through what age you want to have income. (In other words, how long you expect to live.)
I can immediately see why they need the last three, but the first three are mysterious. My Money Blog wrote about this tool in September and attempted to reverse-engineer the inputs. His theory on the current age input is that it is used to work out how many years you have until retirement, which is then used to adjust your retirement income needs for inflation. Apparently, all inputs are assumed to be in 2010 dollars.
I guess constant dollars is a reasonable way to do this, but the website does not actually say that is an assumption. And it leads to some behavior that seems pretty odd if you are not in on the joke. Add twenty years to your current age and you will need less money to retire.
Moreover, there is a basic inconsistency here. The tool assumes that when you say you need $75K a year starting in 2040 you mean $75K in today’s dollars, but it gives you a number in 2040 dollars. It is almost as if the tool is rigged to scare young people into saving more. Now why would a bank want to do that?
Martial status really is a mystery. My Money Blog decided it had no impact at all on the result. But he came up with a theory on why it asks for current income that might also apply to martial status. Current income is used to estimate future Social Security benefits. To an extent, the more you make now, the more you will get from the government later, thus the lower your number needs to be.
This seems to work out. You get a bigger number if you plug in $10K as current income than if you use $20K, but $100K and $200K have the same result, presumably because at those income levels your social security benefit has topped out.
Including Social Security in the calculation has a certain appeal, but this implementation is horrendous. Firstly, the tool does not even hint that Social Security is involved. A reasonable person might assume that desired retirement income included only the money they would get from investments, assuming that that would be on top of the Social Security checks he expected to get.
Is this tool only for US residents eligible for Social Security? Being one myself, this unspoken assumption does not bother me much, but you would think that the Internationale Nederlanden Groep Bank would be a bit more sensitive to such things.
And worst of all, a single current income data point is a lousy basis for estimating future Social Security benefits. The user could be having a particularly good year or be currently unemployed. And even if you could appropriately estimate a lifetime of earnings, guessing what that would mean in government checks starting in 2040 is nearly hopeless.
The last three inputs, age at retirement, desired income, and age you want income to last until, are more obviously important to the calculation. The math is (I am really hoping) relatively simple, just a matter of doing a reverse-amortization. When you decide you can pay $X per month for 30 years on a mortgage and then ask how much you can therefore borrow, you are doing the same thing.
Of course, there are a few key assumptions that the tool is making and hiding from the user. The expected rate of return on investments, and its associated risk level, is a big one. There is also the rate of inflation, which has a big impact here as well as in the years-until-retirement trick mentioned above.
And asking for a terminal age sidesteps the longevity risk problem which for many people is the biggest retirement planning challenge.
I do not have an objection to on-line tools, in principle. What bugs me are tools built by people who apparently think it a virtue to hide as much of the inner workings from the user as possible. This one is particularly extreme, but not, sadly, that far off the norm.
Yes, the tool may only be intended as a starting point for retirement planning. Below the theatrical display of your number it encourages you to take the results to “your financial professional” to “start planning now.” (Click on “Need a financial professional?” and you get a directory of ING contact numbers.)
Okay, so after playing with this toy, and possibly becoming alarmed at the results, you go see your well informed, intelligent, and kindly advisor who has nothing to sell you and will explain all the subtle nuances. It could happen.
The last time I mentioned ING it was to defend a remarkably ordinary and inoffensive bit of junk mail they sent out which had somehow managed to outrage Ron Lieber at The New York Times. Why no condemnation of this tool from the Times, or from anybody else? (With My Money Blog, this seems to be the second time in history that this tool has been discussed. Gather Little by Little mentioned the URL last year, but from the description I infer it was a meaningfully different animal back then.)
The tool is no more obscure than the junk mail, so it is just as fair game and ought to be just as noticeable. Why no criticism? I think this is a case of what might be called the any-advice-is-good-advice doctrine. It holds that there is such a scarcity of personal financial advice out there that any effort, no matter how feeble or misleading, to help people understand their finances is a good thing. I disagree. Bad as the current state of ignorance is, it is possible to make it even worse.