My company uses Vanguard to manage our 401k plan. For several years I have contributed a modest but slowly increasing percentage of my pay, most recently around 12%. When I log in to see how things are going, there is a little traffic light icon to let me know what Vanguard thinks of my plan. Mine has always been yellow, as in, “Well, you probably won’t be a bag lady, but we hope you like Top Ramen.”
Due to some oddities in my circumstances, for the first time I am in a position to max out my contributions this year. I decided to do this by using my end-of-2015 bonus for living expenses going into 2016, and contributing the bulk of my pay (70%) to my 401k for the first 2-3 months (after which I will return to my typical contribution level.) I have put in more in the first three pay periods this year than I might normally do in five months.
Now when I log in, that little traffic light icon is red, warning me that (now that my contributions are at historic highs) that my expected retirement situation is quite dire.
What gives?
(My investments are quite stable and nothing has nosedived).
Most of those calculators can’t/don’t seem to take into account one time windfalls and stuff like that. They make assumption based off stuff like:
What you say you are making now. If you changed your income - to try and tell it about your year end bonus - it is usually going to assume you are making that (or more) each year til retirement.
Amount you will need in retirement. Amany of these calculators will make assumptions either by saying something like "we are going to assume you are going to live with less expenses during retirement - so we will think you need 80% or pre retirement income. Making changes to your income - could effect this assumption as well.
Risk you are willing to take - doubt you would have needed to change this - or it did on its own - so I doubt this would be it - or that it would even need to be a big factor in red,yellow, greening your account
Age to retirement.- Same I doubt you’ll have changed this.
Try and think like a computer. It’s based off either a flaw (I doubt) - or something you changed. It would be most helpful if they gave you a year by year amortization - I don’t think I’ve used their calc. Most calculators are pretty basic. I have a pretty advanced excel based one that does Monte Carlo analysis - which unfortunately isn’t on the market anymore.
Hm, maybe “calculator” is the wrong word. Looking at it more closely, I see it is called an “evaluation.” I cannot change most of the assumptions the site is making. It obviously knows my age (that I have ___ years until retirement) and how much I make. My salary has not changed significantly. I did receive a 2% salary increase a few months ago.
The only things I changed were 1) the percentage/amount I contribute and 2) I had to turn off the feature to automatically increase contributions 1% yearly, since apparently it doesn’t apply once you contribute a certain percentage.
MOST of them assume you’ll want salarysome percentage. But it calculates your salary based on your contributions. You may have skewed the assumptions in that it now believe you’re making a huge amount more than before and you will therefore need a lot more to make the salarysome percentage.
It’ll even out over time if that’s the case. I’d be more concerned that you were consistently yellow before. That tends to indicate that the odds of you acheiving you retirement goal is somewhere between 40-70% in Vanguard’s scenario algorithm. Not a happy place to be.
Well, I’m not sure how changing the percentage would skew assumptions about my income. If Vanguard knows I had been contributing (for example) 10% and that my contribution amount was $100, it should conclude my paycheck was $1000. If I change my percentage to 70%, and the contribution amount is now $700, that still indicates a paycheck of $1000. If I change nothing else (like my asset mix), shouldn’t it only conclude I’ve gotten Very Serious about saving?
And apparently it did; now it is green. I still don’t understand the detour to red. But it looks like you were right suggesting it would even out.
As for the previous yellow status - well, Vanguard only sees what I have at Vanguard (although I know I can link some outside financial assets). I have a retirement strategy in mind, and my 401k is only part of it.
I still don’t understand the detour to red. But it looks like you were right suggesting it would even out.