An article with the hopeful title: “How to Catch With Your Savings” appeared in yesterday’s WSJ. The article’s takeaway – save a lot more, wait as long as possible to take income – is certainly true enough. However one of the article’s three primary financial illustrations was way, way off.
The illustration in question is as follows:
“Financial Engines looked at scenarios for a 50-year old earning $65,000. Putting 6% of that salary per year in a mix of stock and bond funds would likely lead to a portfolio at age 65 that should generate $31,700 of income annually for life.”
As several commenters on the article noted, an annual lifetime income of nearly $32k after only 15 years of savings seemed too good to be true. So I ran the numbers using these assumptions:
- Our 50-year, Bob, old gets 3% annual raises
- The average annual return of his balanced portfolio is 5%*
The result of 15 years of savings was a portfolio worth $106,667. To maximize his income, suppose Bob leverages mortality credits and purchases a life-contingent annuity. According to www.immediateannuities.com, Bob would get a check for about $637 per month, or $7,644 annually – less than ¼ of the $31,700 in the illustration.
Earlier in the article, the author stats that “[t]here’s no disputing that the math isn’t pretty after getting a late start on retirement saving.” How right he was.
Either Financial Engines miscalculated (less likely) or some key facts – perhaps that the 50-year old supposedly just starting to save for retirement had also just inherited $150,000 – had been lost in the writing or editing process (more likely).
It doesn’t really matter. Fact checking is Journalism 101. Investors are confused enough without having to worry that the illustrations which inform their personal “rules of thumb” are closer to fiction than fact. As the newspaper with the highest circulation in America, and the one most closely associated with “investing” for many, The Wall Street Journal has a special responsibility to get stories on personal finance right. According to its web site:
“Each day, The Wall Street Journal seeks to help you succeed by providing essential and relevant information, presented fairly and accurately, from a dependable source you can trust. [Including] expert insight on the market and economy and how both can impact your everyday finances and personal investments.”
While I do not often find factual errors of this magnitude in WSJ articles on personal finance, over the last few years I have noticed that as articles have become shorter, the treatment of subject matter is often more superficial.
In this article, the author points out that:
“[t]he benefit of delaying retirement can be magnified by holding off on taking Social Security benefits until age 70.”
An excellent point. However, instead of informing the reader that one’s annual Social Security benefit might be up to 32% greater (depending upon when one was born) if taken at age 70 instead of one’s full retirement age (perhaps with some illustrations), the point is followed up by some Vanguard scenarios about what happens to nest eggs based on when one makes withdrawals.
I suppose that as media consumers, we all have to be vigilant, but the target audience for many of these articles those least able to recognize when they have been misinformed.
Makes me wonder about all of those articles on the Middle East I have been reading…
*Some might argue that a 5% annual return underestimates Bob’s investing prowess. To those people I would say, “I’ve met Bob, I’m being generous”. But okay, suppose I am. Suppose he earned 8%; that would still translate into only $813/month, 30% of the illustrated amount. To reach $31,700 in target income, Bob would need an average annual return of about 21.67%. I don’t think there is a Bob on the planet that has averaged nearly 22% (legally) over 15 years.