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Ben Carlson: How Much Money To You Need To Retire ?
FYI: There are all sorts of rules of thumb about saving for retirement. There’s the 4% withdrawal rule. Another rule states you need to have saved 20-25x the annual income you want to spend in retirement. Then there’s the one that says you’ll need to replace 80% of your current income from your portfolio in retirement. Regards, Ted http://awealthofcommonsense.com/2017/04/how-much-money-do-you-need-to-retire/
As usual, Ben Carlson writes an information heavy column that is useful. In this instance he addresses saving rates to build a retirement nest egg. There is much uncertainty here given the unpredictable vicissitudes of market returns.
Those of you who are familiar with my posting history can anticipate where I'm going. This is exactly the situation that Monte Carlo simulation tools can be applied. Mostly, Monte Carlo has been recommended fo project portfolio survival odds. It is obvious that that simulation tool can also be used to estimate nest egg accumulation before retirement. Those simulations acknowledge market return uncertainties.
Those uncertainties are important since the annual variability of portfolio returns operates to lower end balance. While planning for retirement, the Monte Carlo approach can be used in two stages: one simulation run that models the accumulation phase, and a second run that reflects the distribution phase.
The projected retirement date is the natural breakpoint for each analysis. The portfolio asset allocation is likely to be adjusted anyway at that critical date. The output of the first phase analysis is used as an input for the second phase analysis.
I always take this opportunity to recommend the Portfolio Visualzer Monte Carlo simulation tool. Once again, here is the Link to it:
There are many other fine simulation tools available. This one is quick, free, and easy to use. It will allow you to explore what-if scenarios to help assess the risks associated with your life changing retirement decision.
I hope this tool will be fully exploited when making that decision. These calculations highlight the very great variability in possible outcomes. Life decisions are never easy. I will now step off my soap box, at least for the present.
Best Wishes for a happy and a successful retirement.
IMHO, one of the better answers I've seen to this question. The last few paragraphs bring it all home. If you can't control your spending habits then no amount of savings is likely to help.
Ignoring the preconstructed set of platitudes which most of us have now firmly committed to memory, I took notice of Mark's comments, which are always worth consideration. I certainly agree with him, and in fact here are those paragraps which he mentions:
"Retirement is still a relatively new phenomenon. In the past, people pretty much worked until they died. No one has this stuff completely figured out.
You can run through all the calculations and spreadsheets you want but life will inevitably throw you a curve ball or some of your assumptions will prove to be untrue. This is an unfortunate side effect of trying to plan in the face of never-ending uncertainty. In a way, there’s a lot of guessing involved in the process.
This is why financial planning is a process and not an event. You don’t simply set a course of action and follow that exact plan for your remaining days. Financial plans should be open-ended because there will always be corrective actions, updates, changes in strategy, or difficult decisions that have to be made.
It’s like the old saying, “Plans are useless but planning is indispensable.”"
I completely agree with Old Joe that " life will inevitably throw you a curve ball or some of your assumptions will prove to be untrue."
Indeed curve balls happen. One advantage of using Monte Carlo tools is that they improve the odds of hitting those curve balls by preparing you with multiple what-if scenario outcomes and providing the odds of their likely occurrence. With those odds, a plan can be formulated that tilts those odds to favor a successful retirement.
And indeed adjustments will be needed as the unexpected happens. Flexibility is always an essential key to survival. In the Monte Carlo code that I developed, if a portfolio failure approached a likelihood, withdrawal rates were slowly reduced to alleviate that likelihood with a minimum impact on lifestyle. These adjustments are easily examined using the Monte Carlo tool.
I am not the Lone Ranger in advocating this easy-to-use tool. About a month ago, Ben Carlson also promoted its utility in an article that listed "the best free tools on the Internet". Here is the Link to that excellent article:
Carlson and I are on the same page since both he and I urged a visit to the Portfolio Visualizer website. A great mind and a not so great mind can sometimes find common ground.
As Alan Lakein observed: "Failing to plan is planning to fail".
Comments
As usual, Ben Carlson writes an information heavy column that is useful. In this instance he addresses saving rates to build a retirement nest egg. There is much uncertainty here given the unpredictable vicissitudes of market returns.
Those of you who are familiar with my posting history can anticipate where I'm going. This is exactly the situation that Monte Carlo simulation tools can be applied. Mostly, Monte Carlo has been recommended fo project portfolio survival odds. It is obvious that that simulation tool can also be used to estimate nest egg accumulation before retirement. Those simulations acknowledge market return uncertainties.
Those uncertainties are important since the annual variability of portfolio returns operates to lower end balance. While planning for retirement, the Monte Carlo approach can be used in two stages: one simulation run that models the accumulation phase, and a second run that reflects the distribution phase.
The projected retirement date is the natural breakpoint for each analysis. The portfolio asset allocation is likely to be adjusted anyway at that critical date. The output of the first phase analysis is used as an input for the second phase analysis.
I always take this opportunity to recommend the Portfolio Visualzer Monte Carlo simulation tool. Once again, here is the Link to it:
https://www.portfoliovisualizer.com/monte-carlo-simulation
There are many other fine simulation tools available. This one is quick, free, and easy to use. It will allow you to explore what-if scenarios to help assess the risks associated with your life changing retirement decision.
I hope this tool will be fully exploited when making that decision. These calculations highlight the very great variability in possible outcomes. Life decisions are never easy. I will now step off my soap box, at least for the present.
Best Wishes for a happy and a successful retirement.
"Retirement is still a relatively new phenomenon. In the past, people pretty much worked until they died. No one has this stuff completely figured out.
You can run through all the calculations and spreadsheets you want but life will inevitably throw you a curve ball or some of your assumptions will prove to be untrue. This is an unfortunate side effect of trying to plan in the face of never-ending uncertainty. In a way, there’s a lot of guessing involved in the process.
This is why financial planning is a process and not an event. You don’t simply set a course of action and follow that exact plan for your remaining days. Financial plans should be open-ended because there will always be corrective actions, updates, changes in strategy, or difficult decisions that have to be made.
It’s like the old saying, “Plans are useless but planning is indispensable.”"
(Emphasis added)
I completely agree with Old Joe that " life will inevitably throw you a curve ball or some of your assumptions will prove to be untrue."
Indeed curve balls happen. One advantage of using Monte Carlo tools is that they improve the odds of hitting those curve balls by preparing you with multiple what-if scenario outcomes and providing the odds of their likely occurrence. With those odds, a plan can be formulated that tilts those odds to favor a successful retirement.
And indeed adjustments will be needed as the unexpected happens. Flexibility is always an essential key to survival. In the Monte Carlo code that I developed, if a portfolio failure approached a likelihood, withdrawal rates were slowly reduced to alleviate that likelihood with a minimum impact on lifestyle. These adjustments are easily examined using the Monte Carlo tool.
I am not the Lone Ranger in advocating this easy-to-use tool. About a month ago, Ben Carlson also promoted its utility in an article that listed "the best free tools on the Internet". Here is the Link to that excellent article:
http://awealthofcommonsense.com/2017/03/the-best-free-investing-tools-on-the-internet/
Carlson and I are on the same page since both he and I urged a visit to the Portfolio Visualizer website. A great mind and a not so great mind can sometimes find common ground.
As Alan Lakein observed: "Failing to plan is planning to fail".
Best Wishes