How Much Will You Need For Retirement?

---

Some insights into the results this tool unearths:

1. You may be surprised to find that an "All Stock" portfolio is risky, but often not as risky in the long run as an "All Cash" portfolio. Why is this? Historically speaking, compared to cash, stocks have done a much better job of a) growing and b) keeping up with inflation. Try switching your portfolio to All Cash and watch how the graph looks like a comb over instead of a mountain.
2. The average is usually higher than the median (mid-point) because the distribution of returns skews to the left. Another way to say this is: high returns are relatively large but infrequent, while lower returns are more common. The bar chart showing the distribution of ending balances is weighted to the left in most setups.
3. Looking at the simulation high and low numbers (which can be mind bogglingly wide), luck plays a role in the individual's outcome. The year in which you retire could make a huge difference, but you won't know until it is too late. For example, the simulations show that people who retired in 1975 were in great shape because of the economic booms in the 80s and 90s, but the people who retired in the mid 60's didn't live long enough to recoup their early losses.
4. Diversification reduces risk but also reduces upside. Portfolios that blend stocks and bonds do a good job of bringing up the low end of the simulation, based on the historical data. This is to a point though... too little stocks in the portfolio and the numbers drop like a rock.
5. Each simulation plods along every year in the way it is programmed to. It always rebalances every year and withdraws the right amount. In reality, life happens, emergencies happen, and investors panic and sell in bad times. This calculator is what they call a 'disciplined investor' in that it doesn't panic during the bad times, nor does it go crazy and buy a diamond studded phone case in the good times.
6. If you have a pension, this will generally allow you to increase your safe withdrawal rate and still meet your goal.
    

How the simulations work:

This calculator is NOT a Monte-Carlo simulator in that it does not generate any fake or random data. Instead, this calculator uses historical data and backtests against it. Essentially it replays what happened in each of the years in the dataset given the inputs and then summarizes the results.

For a 30 year retirement period, this calculator will run a simulation from 1928 to 1958, then it will run a simulation from 1929 to 1959, then from 1930 to 1960, and so on. In simulations that go beyond the present year, it will wrap back to 1928 and count up from there. In this sense, the effect of the great depression is factored in for early and late starting years.

Each individual simulation computes returns by stepping through the years (eg 1928, 1929, ... 1958) and performs the following each year:

• Calculates the change in value in the portfolio.
• Adjusts the annual withdraw amount for inflation based on the CPI (consumer price index) for that year.
• Updates the portfolio balance by adding the change in value and subtracting the withdraw amount.
• Pension - if applicable
  • Increases the pension payout amount based on the CPI for that year.
  • Adds the pension amount to the portfolio balance.
• Rebalances the portfolio.
   

Regarding the Annual Withdraw Percent:

The famous Trinity Study suggests a 3-4% withdraw rate is a good place to be: "If history is any guide for the future, then withdrawal rates of 3% and 4% are extremely unlikely to exhaust any portfolio of stocks and bonds...". Keep in mind, this calculator and the Trinity Study rely on backtesting, which means historical data is analyzed for a 'best fit'. Yesterday's best fit may turn out to be a very poor fit in the future. Nobody really knows for sure what will happen next. In general terms, a lower withdraw rate means the nest egg with last longer.

Simulations with a high withdrawal rate can cause the balance to go negative. Once a simulation's balance goes to zero subsequent returns from investments have no effect.  However, the annual withdrawal amount continues to increase with inflation. A negative ending balance means borrowing was required to cover the withdrawals.

Including pension / social security adds an extra dimension of complexity that can skew the results. It may lead to overly optimistic withdrawal rates given the pension amount is indexed to inflation. 
 

Notes on Inflation:

The numbers this calculator outputs are not inflation adjusted, they are nominal values. The numbers don't translate to actual purchasing power in the starting year of the simulation. However, this calculator does adjust the withdraw amount and pension amount by the CPI each year of the simulation. For example, given a 30 year retirement and an initial withdraw amount of $50,000, the simulation starting in 1975 would increase the withdraw amount all the way to $181,440 in 2005 (in the final year of that simulation run) based on the change in CPI. Additionally, if a pension of $30,000 was entered that starts in year 10, the simulation for 1975 would use $30,000 for the pension amount in 1985, and then from years 1986 -  2005 it would be indexed to inflation for those years. Not all pensions are indexed to inflation, but many do get COLAs of some fashion, so this calculator may give overly optimistic pension adjustments.
 

Historical Data Used:

The data this calculator uses can be found here.
 

Past Performance Does Not Indicate Future Results:

Again, this calculator does backtesting. Past performance does not guarantee nor indicate future results. These results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown.

DISCLAIMER: This calculator is provided for educational purposes and should not be considered financial or investment advice. We have checked the equations and code used and we think they are right. However, we offer you no guarantee of accuracy. If you find a bug please let us know