we've learned

when your finances don’t fit into the standard box // lies the financial industry tells us

raise your hand if one of these things has happened to you:

  • you’ve filled out a retirement calculator, to think about how much you need to save, and realized that there was no option to enter what you spend, only what you earn?
  • you’ve completed a financial assessment of some sort, and been told that you need much more life insurance?

we are planners by nature. if you’re planning for early retirement or thinking about it, you’re most likely a planner, too. we mapped out our finances long before we ever thought early retirement was a possibility, and we’ve always known where we stood relative to our goals. one thing this means is that we’re suckers for any sort of online calculator — how much house can you afford? are you on track for retirement? what’s your overall financial picture?

but once we started planning in earnest for early retirement, we quickly realized: these calculators all take a one-size-fits all approach. they make a bunch of assumptions, namely that:

  • everyone apparently lives paycheck-to-paycheck, and therefore requires their life insurance to equal seven or more years of income (not true!)
  • everyone spends every penny that comes in, and therefore retirement calculations are based 100% off of income, and not spending (lies!)

while we don’t share numbers on the blog, we can say that we’re in pretty darn excellent shape, thanks to years of diligence, tackling debt a while back, and saving aggressively:

  • we have zero consumer or student debt (now — we certainly did in the past). we use credit cards to get airline miles, and we pay them off in full each month. (hello, 800+ fico scores.)
  • our mortgage on our primary home will be paid off in three years, which will be only seven years from when we bought it, and the mortgage on our rental property, a 15-year mortgage, is currently paid entirely by rent from our very reliable tenant. we’re not upside-down on either property, and have significant home equity.
  • we have 401(k) savings that are at a point where, if we never contribute another penny, should yield us enough each year by the time we reach 60 years of age to cover all of our living expenses. (we’re actually starting to scale back our 401(k) contributions to contribute more to our early retirement funds — and don’t worry, we’re still getting our full company matches.)
  • our early retirement (taxable) investments already have enough in them to pay off both of our mortgages and still have some leftover.
  • we are insured to the nines — term life policies both privately and through our employers, good health insurance, long and short-term disability coverage, homeowners and rental property insurance, liability coverage, and several other policies. our respective life insurance policies would cover more than 20 years of living expenses for the surviving spouse, for example.
  • we’re putting away serious money each month through automatic investing, and are on target to retire at the end of 2017.

so what, you might ask, does this information yield on a typical financial assessment? here’s the answer:usaa_financial score_altthis is from usaa.com, where we do our primary banking and have most of our insurance. despite everything we’re doing right, they’re giving us a B- (or possibly a C, depending on the grading scale). why is that? look at the next steps: they think we’re not saving enough for retirement, and they think we need a lot more life insurance. because they base our “needs” off of our incomes, not what we spend, which is our actual need.

plugging our situation into a retirement calculator yields an equally frustrating result:


this is also from usaa. the only option in the calculator having to do with spending was to say whether we are planning, in retirement, to live on more, the same or less than we live on now — though it didn’t ask what we live on now! it only asked about income. they think we will need $16,000/month, which is so hilarious as to be absurd. what do they think we currently live on?! we’d have to try really hard to spend more than $16K a month.

this post isn’t about hating on usaa. we love them for a bunch of other reasons, and they’re just repeating the same lies that constitute the conventional wisdom of the financial industry. we think these lies are the reason why so many people are terrified to retire, because the party line is that your average person needs $5 million to retire comfortably, presumably in addition to having your home paid off. we won’t speak for you, but we for sure do not need $200,000 a year to be “comfortable” (that’s per the 4% rule).

we love that this incredibly vibrant community of pf/fi/re bloggers has sprung up to counter these myths the financial industry perpetuates, and show that it’s not just possible but actually quite achievable to save enough to retire forever at a pretty early age. either we all know something the big banks and advisers won’t acknowledge, or they recognize that they have to scare people and get them to keep investing more money (ahem, with these same banks and advisers) in order for their businesses to stay profitable. (at least usaa is a mutual company, like vanguard, so we know they aren’t just lining the pockets of shareholders when they push fear-mongering advice.)

have you encountered any other financial industry lies that would have you believe you’re not on track to reach your goals? please share!

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45 replies »

  1. Absolutely. Companies make big money on insurance and debt. They don’t make anything off frugal wise people who have savings instead of debt and plan to cover their . Recent example, we took out a small personal loan to cover some of the cost the house we bought. The rest we paid for outright. I said we could afford payments of $400/month and I wanted a totally flexible loan so any extra money we got could directly on the principal. We are expected a chunk o book royalties next spring. The only reason for taking out the loan is because I calculated there would be more cost in taxes if we touched certain savings now compared to a short term loan. I calculated it myself as about 4 years to payoff if even if we put nothing extra in. The person at the bank came up with a plan that would be under $300 a month, take six years to pay off and include $39 a month for term life insurance on the loan balance for the life insurance on the loan. Now exactly who benefited from that calculation? It certainly wasn’t us.

  2. This type of calculators must be working for the vat majority of people that do no research. If you sse the results, you take the insurance, you make take an investment product or 2 and keep on living your life like you were.

    As a coincidence, tomorrow I meet a financial planner for a pre sales interview. I am curious to see what he has to tell and offer me.

    • Definitely curious to know what you hear from your planner! So few in the U.S. seem to have any idea what to do with people who want to retire early.

      • The meeting was over rather quickly… I don’t fit the profile they look for. As I do my own investments, outside the save products they offer, There was nothing to sell.
        At least, that was an honest thing to do. And then I got some advice on how to arrange our wedding papers.
        All in all, not too bad for my time

      • Glad you had a positive if uneventful experience. Such a shame that most planners are paid by commission. Would be so valuable to get an unbiased perspective.

  3. Ha, ha! Yeah, we’ve heard those lies. We’ve written about 20 posts on how awful the advice was that we got from our adviser before wising up. In defense of many in the industry, they are merely trained as sales people and our situations are so rare, I think many don’t even know that they’re giving horrible advice. That is why we now place such an emphasis on educating ourselves and trying to help others avoid repeating our mistakes.

    One quick thought. Even if very light on taxable accounts and heavy on tax deferred, it is still likely beneficial to max out tax deferred accounts before investing anything in taxable as I assume you are high earners. Check this link if you haven’t already.


    • Thanks for sharing the 401k advice. We know we could save a lot on taxes, but need to focus aggressively on building our taxable accounts at this point, and don’t want to rely too heavily on future Roth conversions. We’re still putting plenty in the 401ks, just not quite maxing anymore.

  4. This is great! These calculators were cleverly designed to make you believe that your investment portfolio is lacking. They make their money off of the money you give them. The more you give, the more they make! I know someone who’s worth over 20 million dollars and they told his wife that she would need to go back to work instead of staying at home to raise their three children if they expected to retire comfortably! They own all of their properties outright and have no debt. This is crazy! Of course…they laughed it off and found a new investment firm! :)

  5. I wrote a similar post about a mortgage calculator on CNN Money that basically was a joke in my book. My finances don’t fit the norm. I’m one of two people (including me) that I know my age that maximizes my 401k. I also invest my excess money instead of spending it (for the most part). I also didn’t buy a house as soon as possible with a highly leveraged mortgage and PMI. I also don’t have a car payment. So basically, my finances don’t fit any boxes I’ve seen except in this community.

    • Well at least you know you are doing the right thing. We wonder if those calculators ever sway people off the right path, especially people who haven’t done as much research.

  6. We did one of those retirement calculator things before retirement and it didn’t have a place to enter what our defined benefit pension would be. It basically said we had to save our entire annual salary for about 40 more years to be able to retire. How can those things not consider pensions? I know they are becoming more rare but some do still exist.

  7. My 401k at work has a stoplight warning system in it to tell me how I am doing. Depending on the day, I’ll get: “You will not have enough!” “You may have enough, but your allocations are too risky” because I ONLY have 37 years until retirement. Only 37 years, can you believe that?
    While this is a little different than a traditional retirement calculator on the web, I realized its only a sales tactic. The advisor service behind my 401k wants me to feel insecure in how much I’m saving so I’ll pay them to handle everything for me. Lucky for me, I know better. Now if only I could max that sucker out.

    • Thank goodness you know, and in general it’s probably good if it spurs some people to save more. But still — this fear-mongering in the financial industry is out of control! The only thing we need to fear from them is that THEY will mismanage all of our money and create another crisis. :-)

  8. I think a big lie is the cost of child rearing, and whether or not you can afford to stay home. That is 100% about spending and alternative sources of income (such as spousal income, or passive income), and has nothing to do with the supposed average cost of raising a child.

    • Such a good point! We don’t have kids, but we’ve for sure seen all the stats on what it costs to have a child. There’s no escaping the fact that college costs are rising fast, and not every kid can get a full ride scholarship, but the rest of the numbers seem to be about choices, not cold hard facts.

      • There’s also no denying that a child costs money. Unless you birth it at home (painkillers and risks be damned), feed it on breast milk until it’s three (admittedly, the mother will eat more food then), and then put it to work in the fields so that it can grow its own food. Oh wait, that’s illegal these days.

  9. I’m glad you brought to light your experience! Through my 401(k) platform, I don’t even use the retirement calculator any longer because it makes me honestly depressed. I am 25 (started investing at 22), and when I am advised that I need over 2million to retire “comfortably” blows my mind. I’ve taken the steps to start setting aside for retirement through my 401(k) and IRA (exceeding my employer match!), and I feel like I am on track until I use one of these calculators. It almost would seem beyond discouraging to show people those numbers that haven’t even started saving for retirement, where is the incentive to start when the projected figures are almost astronomical?

    • We hadn’t thought about that side of it, but you’re so right. The big numbers not only freak out the good planners, but they could flat-out discourage plenty of people from trying to save for retirement or other goals, because they seem so unattainable.

      But having been in your shoes, we can tell you that your 401(k) will definitely grow over time, and every cent you put away is a cent well spent. You’re super knowledgeable about all of this stuff, so for sure you know the power of compounding and time. Just keep putting that money away… We are both in our 30s, but have reached the tipping point where we should have enough in our 401(k)s to keep us going after age 60, and that’s if we don’t put another cent in them. So don’t let those calculators freak you out!

  10. I don’t take retirement advice from financial industry sources for the same reason I wouldn’t ask a Chevrolet salesperson what make of car I should buy. Vested interest! People tend to give financial types a ‘pass,’ sort of like a doctor, when it comes to advice. I think the core purpose of every ‘analysis’ and argument and ‘calculator’ offered by the financial industry is selling: the source wants you to contribute to its revenue, period. Looking outside the financial industry for money ideas and advice and self-educating is critical for success!

    • We are there with you! Though — as formerly overachieving students — sometimes we just want that gold star or pat on the head, and the allure of those calculators to validate our approach is tempting. And back when we were on a more traditional path, they always gave us a better score! But not anymore. We’re financial industry rejects, and we’re okay with that. :-)

  11. hahaha omg, I never thought of it this way but you’re right, I don’t spend 100% of my income and therefore don’t need it or more in retirement.

    At 29 I’m not really fixated on saving for retirement. I worked my butt off to get $25K in the bank for retirement before 30 (I hit that amount at… 27 I think) and it’s been growing ever since. Now I just add to it but don’t worry about it. I’m sure I’ll have more than enough.

  12. Great post. You’re totally right that these calculators have way too many assumptions. The thing is, we can never truly predict our retirement situation as things change. The best thing we can do is have a strategy and keep executing the strategy. The financial industry will try to scare you as a way to get you to buy their products.

    • Totally right. We all have to be resourceful and be accountable for our own decisions. All the more reason why the financial industry is so harmful — because it doesn’t empower people to own their own knowledge and make their own smart decisions. Rather the industry would have us all be 100% reliant on them. Thank goodness for this PF blogger community!

  13. I find that many retirement planners do not allow for rental income. Of they plan on a certain % of what you are making now. Fidelity’s RIP and the Flexible Retirement Planner seem to have some of the best calculators.

    Of course, making sure you have plenty of ‘slush’ in the plans so you do not have to account for every $20 is a good thing too.

  14. My employer has some financial guidance tools and one of them told me that I should be able to retire at 32 :) I was pretty impressed that the tool managed to agree with my plans! Most don’t let you input an age under 40.

    • Wish we could use those tools! The good thing is that ours inadvertently told us what we wanted to know, which is that the amount we could expect to have each month is equal to what we need. It’s just not equal to what they think we need.

  15. I suppose you could enter what you spend instead of your total income. Then maybe the calculator would be a little more useful.

  16. This. Over the years I may have done 20-30 of these so called calculators and I always found the results didn’t make much sense. I kept asking myself how the %$^k am I going to spend $5 million by the time I’m 65 until I die? Factoring in compounding and stuff, the number always seemed so outrageous to me. That and, who the $%^k wants to work until he/she is 65? None of it ever made sense, and it just percolated in the back of my mind until I FINALLY discovered this FI community.

    • Did I say in this post that USAA *still* thinks we need to have $16 million saved before we can retire?!?! Hahahahaahahahaahahaha Like what?!?! Does ANYONE need that much? I always wonder if they truly mean these things to be helpful, or if they design them this way to scare people into saving more, so that the financial service companies can earn more profit.

      • Entirely possible. Love them in a lot of ways, but not when it comes to mortgage calculators, their pushiness on life insurance or the way they handle mortgage servicing. (Grrrr, Ocwen!)

  17. My current 401K is managed by Prudential and their retirement calculator actually takes into account expenses not income. It also allows me to enter pension income, so it indicates I should have a surplus at my early retirement date. On a side note, the basic Social Security calculator assumes future earnings until one qualifies for benefits. However, there is a downloadable calculator where you can enter zeroes during early retirement to get a more accurate estimate (subject to change obviously).