Beware of These Numbers

US News

You run across a lot of statistics in the press and on the Internet--or in presidential debates--and many of them are useful. But many others only tell half the story.

Here are five numbers that are bandied about all the time. They may be "accurate" in the narrow sense that they are mathematically correct. But they don't always tell you what you really need to know.

The unemployment rate. The U.S. Bureau of Labor Statistics derives this number from surveys of households, businesses, and government agencies. It's an estimate derived by calculating the number of people looking for work as a percentage of people currently employed. But here's what the number hides. It only views someone as unemployed if they have actively looked for a job within the last month. It ignores people who retire early because they can't find work, people who get discouraged and give up looking, and people who stay home and take care of the kids because they can't find decent work. The unemployment rate also classifies people with a part-time job as fully employed, even if they want a full-time job but can't get one. Today, the official unemployment rate is 7.8 percent, but the unemployment rate after adding in Americans who are underemployed or too discouraged to look is more like 14 or 15 percent.

College tuition. Tuition at one of the major private liberal arts colleges in the U.S. is now about $55,000 per year. Tuition at a state university typically runs about $10,000 to $15, 000 a year for in-state students and $20,000 to $30,000 for out-of-state students. But this is the list price. Usually, the more expensive the college, the bigger the potential discount. A lot of colleges print a number called "cost of college after need-based aid." This lower figure is created by the college after taking into account their secret formula for financial aid. Will you pay the list price, the average price, or something else? The only way to find out is to send the university all your personal financial information, then let them massage the data and give you the real price.

Mutual fund average rate of return. Mutual funds typically report results by touting their rate of return. But be careful. There's more than one way to calculate an average rate of return. A simple average adds each year's rate of return, then divides that number by the number of years. But this figure can be misleading. For example, if a fund's return is 100 percent the first year, and -50 percent the next, the average rate of return is 25 percent. But, in fact, you've ended up with the same amount you started with, or a 0 percent return. A better way to look at fund returns is with the compounded annual growth rate (CAGR), which gives you a truer figure, especially over a longer term.

The inflation rate. There are many measures of inflation, from the Producer Price Index to the GDP Deflator and others. The most famous number is the Consumer Price Index (CPI), generated by the Bureau of Labor Statistics. It represents a statistical estimate of the change in prices of a "typical" basket of consumer goods. But these goods likely do not reflect what you actually buy. And that may explain why the reported CPI often puzzles people who watch the price of gas skyrocket or see the cost of their insurance policies go up. Seniors, for example, spend more on health care than average Americans. Since health care inflation is higher than overall inflation, the inflation rate for seniors tends to be higher than for younger people.

How much you need to retire. There are as many estimates for this number as there are financial advisers. One rule of thumb pegs the number at $1 million. Another often-quoted figure is ten times your last annual salary. Yet another estimate is enough capital to produce 80 percent of your pre-retirement income. Of course, how much savings you need to replace 80 percent of your final annual income depends a lot on how good your pension is, and how much your Social Security benefit will be. If you have a great pension that's safe and secure, you may need no savings at all. If you have no pension, you will need closer to ten times your annual income. The point is, nobody can give you a reliable number for how much money you need to retire except yourself, and it depends on your own retirement program and your personal lifestyle.

Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.

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