FYI: The president of the American Finance Association, Dr. David Hirshleifer, noticed something peculiar about Vanguard's Retirement Income Calculator. By its reckoning, a hypothetical 55-year-old investor who saved at the tool's highest possible rate, earning the highest possible return, holding the highest possible current retirement assets, and willing to settle for the lowest possible income-replacement rate … would fail. Her projected monthly income would fall short of the projected goal.
I doubted that Vanguard had botched the math. The second-order calculations for retirement-income forecasts can be tricky--for example, if and how to model portfolio volatility--but the basics are straightforward. The investor owns this much money, is saving that that rate, and therefore will possess the following estimated amount on his 65th birthday. Annuitize that total and divide by 12 to make the payments monthly. It's a spreadsheet exercise.
Vanguard did not botch the math. These are the tool's minimum and maximum settings:
Income $400,000
Savings Rate 15%
Current Assets $2 million
Expected Annual Return 10%
Replacement Rate 60%
Enter those figures, and the tool projects $15,789 in monthly retirement income, which sounds about right. But the goal is $20,000 monthly, which is exactly right ($240,000 annually, that being 60% of the investor's working salary). Even the most generous Social Security estimate won't square that circle.
Regards,
Ted
https://www.morningstar.com/articles/941453/when-vanguards-retirement-income-calculator-stopped-making-sense
