Tuesday, December 06, 2011

Merrill *not* Lynch Retirement Calculator

For those of you from outer space, the American economy has been having a hard time recently. One shining example is the paragon of Wall Street, Merrill Lynch, which imploded nicely several years ago, but was too big to fail, so it was "bailed out". It now survives as a subsidiary of Bank of America, who was also too big to fail.

We'll I stumbled upon web based retirement calculator (click the Find Out button to the right) and decided to have some fun. I learned something interesting.

First the rules of the game: The calculator asks questions and determines a magic dollar value that you have to achieve. Four factors drive the calculator:
Current age
Current retirement contributions
Current income
Projected retirement age
Obviously the last variable is stupid, since everyone knows that retirement age is 65.

Given my actual age, a reasonable estimate of the value of my retirement accounts, and a reasonable estimate of my current salary, the calculator yielded a pass/fail rating. Pass was defined as having enough money to maintain my current lifestyle, and fail was defined as running out of money before I died... Which is apparently at age 91.

I had control over two factors, which determined if I passed or failed: First, the amount of money I contribute each month for retirement. Second, my investment style, defined by my degree of risk exposure. What I did not have control over was market performance, so I was presented output based on average market performance and below average market performance, which I guess means Merrill and Bank of America do not expect above average market performance over the next 45 years.

And what I learned was I get a passing grade if I save X dollars a month, using Y investment strategy:
$10,000 Conservative
$9,200  Moderately Conservative
$8,700  Moderate Risk
$8,500  Moderately Aggressive
$8,200  Aggressive

Needless to say, my New Year's resolution will not be to save $10,000 a month. So, I guess I "lose". But here's what I see as the moral of the story: The difference between playing it safe and taking the biggest gambles is less than 20%. If I put in a more realistic monthly contribution of $1,500 per month and act conservatively, I retire at 65 and run out of money at 67. If I'm aggressive, I run out of money at 68.

So, I guess I'll go aggressive. Let's be optimistic! What's the worse thing that could happen. After all, what's the likelihood that Wall Street will screw up again in the next 20 years?

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