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Calculators off the mark?

- Alan Lavine and Gail Liberman

You can take full control of your family's investments without bothering about the math. Just go to your favorite online calculator.

Want to compare mortgages? Go to www.federalreserve.gov. Click on "Consumers" and then, "mortgages" for a mortgage comparison calculator.

Want to know how much in earnings your CD truly will generate? Click on "Finance calculators" and then "Savings Calculators" at www.money.aol.com.

At www.finra.org, a calculator can help you determine the impact of mutual fund expenses and even help you compare expenses on mutual funds and exchange traded funds.

But once you find the calculator of your dreams, your work isn't over. Recently, we noticed one online retirement calculator gave us a significant higher figure on the amount we'd need to retire than others--for some good reasons. It failed to consider either our household social security income or our living expenses.

Of course, the calculator was set up by an insurance company as part of a media campaign to sell annuities! A higher figure would be more apt to scare someone into a sale.

The not-for-profit Retirement Income Industry Association (RIIA), Boston, has unveiled a set of industry disclosure standards for the development of retirement income calculators. But whether they'll be uniformly used is a question.

"Knowledge Wharton," a publication of University of Pennsylvania's Wharton School of Finance, earlier this year highlighted problems with financial calculators on investment web sites. Among those:

  • Calculators can easily overestimate a household's annual retirement cost by 10 percent. In addition, these types of calculators only use rules of thumb. For example, retirees can't always assume stocks earn 8 percent annually and inflation will remain at 3 percent annually. Nevertheless, many calculators use those assumptions.

  • Calculators can't accurately predict the risk that a breadwinner will lose a job or if Social Security and Medicare benefits will be trimmed. Also, results may depend on different assumptions entered.

  • Retirement calculators, which assume people need 75 percent to 85 percent of their pre-retirement income, assume stocks and bonds will perform at historical rates of return. But what if the stock and bond markets underperform for a sustained period?

    With any calculator a host of assumptions are apt to be variable. Not all calculators cover everything. Also, numbers that are taken for granted today could change significantly in the future.

    Also, consider:

  • No one can accurately predict investment returns. Averages factored are exactly that.

  • Inflation. The future could put it significantly higher or lower than the general average of 3 percent annually.

  • Taxes. If a tax bracket is factored, make sure it's the one you're in.

  • The calculator may operate under assumptions, which may or may not be appropriate. For example, required minimum distribution calculators, which figure how much you can withdraw from an IRA, should disclose whether the calculator is using IRS mortality tables.

  • The business nature of the web site hosting the calculator. Assumptions easily may be tailored to encourage a specific sale.

  • Whether financial services providers have added twists to their products that calculators may overlook.

  • Calculators may have temporary or permanent glitches that could throw off your results.


    Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.

    To read more columns, please visit the column archive.

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