The Boulevard to Retirement

So what happens when the economy hits a bump and some of the luster comes off the nation’s financial outlook?  Do people modify their behavior so that they can still save for retirement or do they just worry more because it’s something that they’re increasingly unable to do.

If what’s happening with retirement accounts is any bellwether, folks are pulling their savings out.  According to a recent MSNBC article:

“Some of the nation’s largest retirement plan administrators, such as Great-West Retirement Services and Fidelity Investments, are seeing double-digit spikes in hardship withdrawals and increases in loan requests, a sharp departure from levels that traditionally varied little.”

What’s interesting, is the article ties these 401(k) loans to credit card debt, which in turn is tied to living beyond your means, which will ultimately have a very real effect on US long-term economic stability.  And so we have a government offering up an economic stimulus package designed to reinforce an over-emphasis on consumerism.  Somehow it’s hard for me to follow the logic.

At some point, we’ll have to address the “direct hedonistic component,” which is what drives unwise consumer decisions.  That’s what gets us thinking, “Well, I could put this bonus towards my retirement (a distant unknown that could reduce future anxiety), but what I’d really like to have that new BMW instead (something that’s going to be enjoyable now- though the satisfaction will wear off over time).”

So it appears that the recession is going to take both a short-term and long-term toll if consumer continue to tap their retirement savings to cover poor spending decisions.  What would be interesting is if the economic stimulus package focused on making saving and retirement planning look patriotic, instead of a quick infusion of cash into the economy focused on spending, which is likely to do very little good over the long term and actually reinforces some of the bad habits that helped get us here in the first place (an economy overly reliant on consumer spending).

If you're new here, you may want to subscribe to our RSS feed
or get updates by email. Thanks for visiting!

I just spent the last week getting in touch with what life feels like at the end of retirement. The flu set in and I spent my days just hoping for the next to be a little less painful.

And it made me think that I don’t want to be spending my retirement isolated in some apartment where no one in my building knows me. At the same time, a certain amount of independence, like still being able to live in an apartment, is a real luxury. I’m really not keen on spending my days in a nursing care facility.

Who knows what kind of situations we’ll find ourselves in at the end of life? It’s partly this uncertainty that makes it difficult to motivate to plan for retirement. I should plan to live to 90, but what happens if I only make it to 80, or just 70? I can always keep working if it looks like my health is going to carry well into old age, right?

A study by McKinsey points to the fact that of those presently retired, 40% were forced into retirement. The two main causes of these premature retirements: disability and layoffs. An early retirement can put a serious crimp in quality of life later on. Fortunately, there are still some social and community services for older people to ensure that they can get the most basic care.

Retirement planning is tricky because we all want to hope for the best and it’s an event that is sufficiently far enough away that we can tell ourselves that there will be plenty of time to deal with this later. It’s also complex and not clear to most on where you should start your planning. The more money saved now, though, could be mean tens or hundreds of thousands of dollars extra in retirement. And that could have a major impact on how you live your life in your later years. Worse case scenario if you over-save, you’ll have money to leave behind so that others may benefit from you hard work. That’s not so bad.

As the housing market does a nose dive in certain areas of the country and analysts suggest that we’re not yet through the worst of it as adjustable rate mortgages continue to reset, many people nearing retirement are getting a bit more anxious.  Somewhere around 50% of Americans are counting on their home as a significant part of their retirement nest egg.

I had coffee last week with someone and he started talking about Boulevard R’s calculations.  He assumed that we were counting the equity in his house as an asset that could be counted toward his retirement.  Lots of Americans are counting on the recent gains in the housing market to fund their retirement.  Unfortunately, your home is not something that you want to bank on.

First of all, you have to live somewhere, unless you plan on selling your home and spending the rest of your life living on a tropical beach in a tent (doesn’t sound half-bad, though it might be hard to fit all your furniture inside).  Second, you’re not going to get nearly as much money out of your house as might think.

Randy laid out the math nicely in an earlier blog post.

There are a lot of expenses when it comes to tapping the equity in your home.  Naturally, banks and other lenders are particularly good at getting more of your assets into their pockets.  Up until recently, I believe that the market capitalization of financial services companies included in the S&P 500 accounted for over 20% of its total value.  It’s quite rare for any sector to be so dominant and it’s a position that financials have held for multiple years.

So soon, Boulevard R is going to be implementing a new feature to allow users to count the equity in their home (though we don’t recommend it and urge consumers to beware of reverse mortgages, at least until they become a more reputable financial transaction without so many hidden fees or with such poor conditions).  The stark reality is that for many Americans, they’ve saved so little they’re going to need to tap into all the assets they can.

One more reason to do all you can to get on track now, even if that means delaying retirement a bit.  Just don’t get stuck in the trap that you can just work forever.  According to McKinsey, 40% of current retirees were forced to stop working earlier than they had planned, primarily through either layoffs or becoming disabled on the job.

There are a lot of downers when it comes to retirement.  There’s hope though- if you understand where you stand, become better informed and start to make incremental changes now, you’ll be able to navigate to a secure retirement.

In the months and months we’ve been working away, we’ve had the opportunity to check out a lot of different online tools aimed at helping consumers come up with a plan, or at least a calculation, for retirement.

Boulevard R is continually refining our calculations so that they’re increasingly accurate and customized. We’re using a cost of living index by zip codes now and are fine tuning the impact of buying a home (like any independent financial advisor worth their salt would tell you, you shouldn’t count on the equity in your home as part of your nest egg because you have to live somewhere)).

In the process of coming up with our own algorithm and testing lots of other tools to see how they approach retirement planning calculations, I think the different types of planning calcs can be roughly grouped into the following categories:

1. Hi, meet our sales rep
2. Hi, we’re here to help (meet our sales rep)
3. Hi, we’re here to help (and they really are)
4. Get out the your tax returns from the last 3 years
5. You like multimedia? Have I got a site for you!
6. You like meaningless calculations? Step right up!

Let’s start at the top and explore #1 a bit more. Fidelity’s myPlan tool is a classic example of this. It gives you a quick and easy calculation, coupled with voice over and sliders. The user interface is very friendly and engaging, but the problem is that it generally comes up with an unrealistic number, because so many of the big impact assumptions are hard wired into the tool itself (like the replacement rate for income). Since you realize that this point that saving $1.2 million is a daunting proposition, talking to a Fidelity rep might be an increasingly attractive proposition. Many of the tools made by financial services companies fall into this group, principally because they’re more aligned with their own interests than those of their customers.

#2 is a more subtle variation on the first approach. It tries to help, sometimes valiantly, but in the end the goal is to provide an array of options, one of which (guess which one) is more attractive than the others. Nationwide does a nice job with this on their Retireability Check. They have a lot of good information about how to choose a financial advisor. But guess what- Nationwide is not in the business of generating leads for non-associated financial advisors.

Financial Engines is a good example of #3. Tools built by a Nobel Prize winning economist. They really set out to create tools to help consumers make good investment decisions. The problem is that most people don’t what to use them. They’re not particularly engaging and you’re totally isolated from anyone else who uses the tool. No collective wisdom, no tips or advice, just modeling with a pretty bland interface. When it comes to picking good mutual funds, they make it pretty easy, though it’d be interested to see how the top mutual funds perform against index funds.

Of all the different kinds of gifts, the one that Boulevard R aspires to give to everyone who uses our application is the gift of financial knowledge.

We live in a society where most Americans have received very little in the way of education on personal finances. Research by Annamaria Lusardi and Olivia S. Mitchell (Financial Literacy and Planning: Implications for Retirement Wellbeing. University of Michigan Retirement Research Center, 2005) discovered the following about American’s financial literacy:

1. One out of three Americans could not answer this question correctly: Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow: more than $102, exactly $102, less than $102?
2. One out of two could not answer this question correctly: “Buying a single company stock usually provides a safer return than a stock mutual fund.”

Regardless of one’s financial literacy, the nonprofit Employee Benefit Research Institute found that just doing a retirement needs calculation is enough to motivate more than half of those who do one to start saving more. Realizing that there is a considerable anxiety among consumers when it comes to retirement and that many people (particularly parents) are concerned about how those who are close to them are saving for retirement, we created a new feature to help give the gift of financial education.

http://www.boulevardr.com/br/gift/landing.jsf

Boulevard R wants to help facilitate a discussion around one of the most sensitive issues there is: saving for retirement. To help get retirement planing on the radar for those close to you, we help you kickstart someone else’s plan (just fill in basic information like age, gender, marital status and profession) and then offer a gift (optional) if they complete a retirement calculation. You can give money towards an IRA, iTunes songs or create your own gift.

In the long run, a little reward now can pay huge dividends later for those close to you if they start to save a bit more for a secure retirement. And it also makes us feel like we’re doing our job.

We got some nice press today from the good folks over at FiLife.com.

Kristen, who covers the retirement planning and investing beat, wrote up a thoughtful piece on what we’re up to. She did a great job of accurately depicting our approach to planning, as well as a laying out what’s coming down the pipe.

The angle she took by including the mental health aspect of what Boulevard R is about was an interesting emphasis. The reality is that a lot of Americans are pretty stressed out about retirement. Even if they’re doing a good job, they’re constantly hearing that it’s never good enough. Boulevard R tries to go beyond what existing retirement calculators offer, by customizing your calculation (using Bureau of Labor Statistics, Census and IRS data), so the amount you need to save on an ongoing basis is reflective of what your life situation is, as well as your expectations for retirement.

We can all do more to prepare, but how about just making sure that we have our basics covered and then go from there? In an age where the safety nets are fraying and we have to depend on ourselves (and our own judgment on saving and investing, while providing for those who depend on us), if Boulevard R can remove some of the stresses inherent in personal finance, while motivating people to do the best that they can to prepare for life after work, then we’ll have done something special.

I visited my local farmers market on Saturday and was amazed at how much great, farm-fresh produce they have in January (full disclosure: I am in California). It got me thinking about healthy lifestyles and their long-term impact on retirement planning.

At the end of last week, I was talking on the phone with someone who has been using the site (we love to hear what you think about Boulevard R and how we can make it better- you can call us at (888) 412-5837) and they mentioned that the impact health care costs were having on their retirement plan was much more significant than they had anticipated. Today, I met with one of the independent financial advisors on our team and heard something similar- health care costs can blindside consumers in retirement. There is actually a Medigap insurance coverage window once you retire, and if you miss it, later on insurance companies can legally refuse to provide you with insurance.

Something else to consider, if you’re thinking about retiring early (before you turn 65), you’ll need to get some health coverage (a lot of consumers think their company is going to cover their health care expenses in retirement, but companies are increasingly cutting back on these benefits, since it is such a large expense). A basic way to calculate how much this will cost is: $1,500/year for basic coverage and increase that number by 10% for each additional year. And that number is probably if you’ve been going to the farmer’s market a lot and exercising regularly.

So if you’re not already doing it, maybe it’s time indulge in some fresh produce or get on a regular exercise plan (didn’t we just do our new years resolutions?), since another important part of planning for retirement is considering your quality of life for when you don’t have to work any more. Poor health can not only contribute to poor quality of life, but it can also be very expensive. If you miss your Medigap insurance window or don’t insure properly, and you develop a chronic health condition, you could be on the hook for tens of thousands of dollars. Conversely, you may have saved enough, but are unable to travel or do the things you enjoy the most because of poor health. Any way you cut it, in the long term it will pay dividends to spend a little more time taking care of yourself now. As it was said to me while traveling on a train in India “Health is wealth.” Well said indeed.

Don’t look now, but if you’ve found this blog and haven’t yet been through Boulevard R’s 5-step process, the next logical step is for you to get on the retirement scale and weigh in. Not necessarily a fun proposition.

A lot of people don’t want to put themselves in the position of receiving potentially bad news. Life is hard enough already, so why risk ruining a perfectly good day by a self-inflicted reality check? Maybe, though, the news is good (or at least not as bad as you thought it might be). You may find out that you’re on track to have enough saved to get you to 85 and if you take action now, you’ll be able to afford a 3-week vacation to Europe every two years.

One of the issues we’ve wrestled with here at Boulevard R, is how to constructively return results that are both highly accurate and inspire you to continue (whether improvement means you’ll be able to retire at 59 instead of 65 or that you’ll be on track to have enough money to cover your basic needs in retirement until you’re 87). Retirement is such a delicate issue, since it’s both complex and emotionally charged (a big and sometimes feared unknown).

Another thing we’re trying to figure out is what makes people come to the site? Since we don’t have a lot in the way of PR driving traffic, what makes them click on the search link for Boulevard R? It might just come down to the fact that they’re curious. Curious people who want an answer and some help figuring out what Gallup cites as by far the biggest financial concern for Americans. We think curiosity is a good thing- and so does Seth Godin:

Have any insights about stepping on the scale and why you would or would not want to? Please let us know!

There are many ways to start a company.

The great thing about doing a financial services startup is that you learn so much more about personal finance and best practices.  Boulevard R has been very fortuante to have a couple of great independent financial advisors informing the calculation process.  Another benefit is that through interacting with users and researching the pain in planning for retirement, you get a much better understanding of the issues consumers find challenging and where they would like assistance.

The personal downside of doing a personal finance startup (at least a downside based on how we’re funding the venture) is that now I understand the real opportunity cost of my lost income, since we’re paying ourselves so little.   Since my background is in consumer rights, not personal finance, many of the retirement planning issues we’re addressing are relatively new to me (fortunately we have a great team to create the backend financial model and run tests on them to verify their accuracy).  Saving for retirement and the impact of different financial decisions can be quite complex, but from a calculation standpoint, I’ve really come to appreciate the value of the fundamentals, like how you want to front-load the planning effort when you’re younger to make best use of compound interest.

I wish I could both salt some money away for retirement, as well as make sure Boulevard R stays alive, but right now it’s one or the other.  I guess the success of Boulevard R is my retirement plan.

So instead of having a secure job that pays well and is mildly interesting, I get to do something that I know will ultimately help millions of Americans and address the most pressing personal financial issue of our time.  Low pay and no benefits aren’t a bad trade-off for creative license and getting to do something you’re passionate about.

I’d be really interested in finding out how the startup and small business community perceive the sacrifices they have to make when starting a venture.

Most online calculators focus on a specific event, like retirement, buying a home or college savings.  Boulevard R, however, takes an integrated approach that considers all these factors and does it in a way that is designed to be used on an ongoing basis.  Our goal is to simulate the planning process someone would go through with an independent financial advisor by looking at the bigger financial picutre, since it’s rightly said that “Retirement is the one financial event that you can’t borrow for.”

Nearly all the online tools you’ve ever used have assumptions hard-wired into the calculation that do not allow for adjustments and forecast on a linear basis (assuming the same rate of return year in and year out).  Our approach is based on best practices and is effectively the process you would get if you sat down with an independent financial advisor, so we take into account your income, number of kids, cost of living and also run 1,000 Monte Carlo simulations based on historical market return (which also changes the results, because we run a new calculation with Monte Carlo simulations every time you adjust a variable).  In short, Boulevard R’s engine tries to more realistically simulate all the impacts on retirement calculations (and there are many) than any other tool available and that makes it more sensitive to smaller adjustments.

Boulevard R’s approach to planning for retirement is a lot like sailing from San Francisco to Maui.  You don’t set your course, kick back and then assume you’ll be in Maui in 2 weeks (this is the approach most online planners take).  You have to make course corrections along the way.  One of the the great aspects of the tool is that it models the impacts of different financial decisions or events, so that consumers can make more educated financial decisions.

Boulevard R makes a realistic forecast based on the many different factors, but if you tweak some of them- inflation, for example - you’re going to get a drastically different result, since that % is compounded over many years.

We’re continually working to customize our calculation and improve the user experience to help consumers reach a secure retirement.  Success for us is helping consumers who are not on track to get on track and for those who are on track, we want to help them retire even sooner.  As we talk with users we continue to learn.  We appreciate that there may be better ways to return results, particularly for those who might end up in the “red” and we’re working on ways to do this effectively so that we don’t mislead people and at the same time motivate them to look at some changes they can make to improve their situation.  While we also want to return results that inspire hope, we also have an obligation to be realistic.  If we were just calculating what people need to retire, and not considering their financial goals like buying a home or saving for college, their finances would look a lot better.  But the reality is that those goals have a very significant impact on retirement, since they represent a real opportunity cost.  That’s something that most retirement calculators won’t tell you.

Please keep the feedback coming- support@boulevardr.com