Why do you see a financial advisor?
ONE reason that people go, is because they expect that the financial advisor has great modeling tools, so they should be able to calculate your financial position and future needs with great accuracy.
What if I told you that doing your own financial planning using the simplest possible online tools and financial spreadsheets would get you closer – much closer – to your real financial needs than any ‘typical’ financial advisor can? What if I told you that is exactly the reason why I do my own financial planning using those exact same simple online tools and financial spreadsheets?
But, what if I told you that most financial advisors routinely underestimate your retirement needs by ~80%?
Would you even pay for such ‘professional’ financial advice again?
Well, a week ago I covered the first of best selling author, Dan Ariely’s comments about financial advisors, but he then goes on to say:
In one study, we asked people the same question that financial advisors ask: How much of your final salary will you need in retirement? The common answer was 75 percent. When we … asked where they got this advice, we found that most people heard this from the financial industry. You see the circularity and the inanity: Financial advisors are asking a question that their customers rely on them for the answer. So what’s the point of the question?!
In our study, we then took a different approach and instead asked people: How do you want to live in retirement? Where do you want to live? What activities you want to engage in? And similar questions geared to assess the quality of life that people expected in retirement. We then took these answers and itemized them, pricing out their retirement based on the things that people said they’d want to do and have in their retirement. Using these calculations, we found that these people (who told us that they will need 75% of their salary) would actually need 135 percent of their final income to live in the way that they want to in retirement.
This is a really important point; let’s say that your expected final salary is $100,000 in today’s dollars.
Then at 75%, you would need a nest-egg of $75,000 x 20 = $1,500,000
But at 135%, you would need a nest-egg of $135,000 x 20 = $2,700,000
[AJC: the ’20’ in the above calculations comes from my Rule of 20; see this early post]
That’s a shortfall in your retirement of $1,200,000 … more, if your expected ending salary is over $100k.
Now, what if I told you that I think your shortfall is not likely to be $1.2 million, but closer to $2mill – $3mill or even more?
I’ll let you know how I think you should calculate your true retirement needs in the next – and, final – post in this short series, because knowing what you’re aiming for now will stop a LOT of disappointment later 😉
I think your onto something. Kiyosaki said something similar in one of his books. He stated that we shouldn’t be aiming to live on less in retirement but that’s what we are coached to do by the financial industry. If we invest in our own financial education, we can put ourselves in a position such that we don’t need silly estimates from the industry.
@ Chris – Exactly! And, in my next post, I’ll show you how it’s done 🙂