A Better Retirement Planner

MJG

Hi Guys,

Yesterday, in response to the MFO exchange on younger folks retiring comfortably-not, I recommended a Monte Carlo simulator from MoneyChimp to add to your retirement planning toolkit. I made that recommendation mostly because of its simplified input format. It has limitations.

Upon reflection, I recalled an alternative that also is rather simple to input, and offers its users a wider range of study options. The simulator was assembled by the Flexible Retirement Planner website. You might want to explore its many fine features. Here is the Link to it:

http://www.flexibleretirementplanner.com/wp/planner-launch-page/

It is much more comprehensive than the MoneyChimp version, yet takes only a few minutes to complete the requisite inputs. Enjoy.

Since I hadn’t run the code for quite some time, I did a few practice calculations.

For the 30 year retirement timeframe that I tested, it is not surprising that when I decreased portfolio volatility for an all equity portfolio from 20% annually to a 15% level, without substantially decreasing average annual returns (that’s almost plausible), 30-year portfolio survival rate for a 4% annual drawdown schedule increased from an unattractive 79% to a largely more acceptable 92% likelihood.

If bond-like returns of 5% (with standard deviation of 5%) are postulated for the portfolio with the same 4% drawdown schedule, the portfolio survival rate drops back to an uncomfortable 77%survival probability. This result reinforces the current financial advisor recommendation to keep a substantial fraction of a retirement portfolio in equity positions.

These are examples of the what-if analyses that Monte Carlo codes permit. The 3 illustrates that I reported took less than 5 minutes to input and to calculate completely. These types of analyses are almost too much fun. Please give it a try.

Best Regards.

Dex

Do this exercise and let us know how it affect your retirement investment.

Line item budget for 5 years
- pension
- social security
- dividends
= amount to withdraw from investments (or deposit). Put 1 year of this in a money market account, the remainder in an interest bearing low risk investment.

This does 2 things
1 - when your investments are positive you can withdraw years 6,7... and deposit.
2 - when your investments are negative (market downturn) you have 5 years you don't have withdraw any money.

Dex

Here's an example:
$50,000 budget/ year

250,000 Spending
-000,000 Pension - you don't have one
-100,000 Social Security
-100,000 Dividends/Interest Apx 300,000 paying dividends/interest You have other $
= 50,000 withdraw from savings - 10,000 into money market, 40,000 into other

So you have:
300,000 paying dividends/interest
10,000 MM
40,000 other
$350,000 Total + your other money

250,000 Spending
-000,000 Pension - you don't have one
-000,000 Social Security - retire before eligible or not there for you
-100,000 Dividends/Interest Apx 300,000 paying dividends/interest You have other $
= 150,000 withdraw from savings - 30,000 into money market, 120,000 into other

So you have:
300,000 paying dividends/interest
30,000 MM
120,000 other
$450,000 Total + your other money

You don't say how old you are but let's assume you are 30.
BUDGET
Interest rate 3.5%
Years 30
Starting amount $50,000 - budget

Future Value: $140,339.69/Year

Dividend/Interest Income:
Interest rate 5%
Years 30
Starting amount $350,000

Future Value: $$1,512,679.83

http://www.investopedia.com/calculator/fvcal.aspx

So, at a minimum, if you get SS you need 1.5M in savings in 30 years.

If, you don't get SS you need $1,944,874.07

Dex

I don't think anyone would recommend retiring with just 5 years of cash flow in the bank and $300,000 in other investments. So, let's use $1,000,000 as your goal plus the first 5 years with SS.

Interest rate 5%
Years 30
Starting amount $1,050,000

Future Value: $4,538,039.49

Interest rate 3.5% - same as expense growth rate
Years 30
Starting amount $1,050,000

Future Value: $2,947,133.39


So, give up the hope ...



Here is my 2016 cash flow
(29,500) Spending
152 Cash Back
222 Cecking/Int
28,920 Dividends/Interest
10,713 Money Market
13,814 Pension

24,321 Total

MJG

Hi Dex,

I did not follow your analyses in any detail, but I believe you are being far too pessimistic. A 30-year projected retirement is doable with less funds than your analyses suggest.

How do I know this? I did a few calculations using the Monte Carlo simulator that I referenced on this exchange. Please give it a try using your specific constraints. I believe it offers some hope for initial retirement portfolio values in the one-half to one million dollar range for a COLA adjusted withdrawal rate starting at $30,000 annually.

Using end of period portfolio survival probability as the success criteria, a one-half million dollar initial portfolio worth is only a coin flip likelihood. That’s not acceptable. But a one million dollar portfolio has a survival likelihood in excess of 90%. Those odds were estimated with a diversified portfolio with an average annual return of 8% and a standard deviation of 15%.

I did some what-if scenarios also. For the inadequate one-half million dollar portfolio, the survival likelihood odds can be incrementally improved by about 10% if a more aggressive equity portfolio is postulated, or if a portfolio with a reduction in standard deviation is assembled, or if a flexible drawdown strategy is practiced. Flexible meaning that COLA raises are held to zero for negative return years. These tactics can be individually deployed or used in concert.

My analyses were very incomplete and were done for illustrative purposes only.

Stay strong, all is not lost. And use the referenced Monte Carlo code.

Best Wishes.