While there is no shortage of retirement advice or retirement advisors, many consumers who distrust both slide into retirement with little preparation -- other than having grown older. Some of the reasons for this lie deep in the human psyche, beyond any practical remedy. But there is one important factor that discourages retirement planning that is remediable: that is the lack of effective retirement planning tools that retirees have the capacity to use. To fill that lack, my colleague Allan Redstone and I decided to construct a simple retirement planning calculator and make it freely available to anyone.
Requirements of an Effective Retirement Planning Calculator
Spendable Funds: A potential retiree wants to know how much spendable funds she will have each month during retirement. Spendable funds consist of earned income, income from social security, other pensions and annuities, drawdowns of financial assets, and reverse mortgage payments.
Net Worth (Estate Value): The second thing the retiree wants to know is what her net worth will be each month during retirement, which is also her estate value when she dies. Estate value is the sum of financial assets and net home equity, which is her home value less any reverse mortgage balance.
Simulation Capacity Based on Desired Spendable Funds: For the calculator to be useful, the user must be able to specify a desired amount of spendable funds, and immediately see the implications in terms of future estate value and spendable funds. If the desired spendable funds is set too high, for example, the required asset drawdown will deplete the estate value and result in a sharp reduction in spendable funds at some future time. In the opposite case where desired spendable funds is set low, the user will find the estate value rising, which may or may not be desired. Through multiple simulations, the user finds the most attractive pattern of spendable funds availability and estate value over future years.
Graphical Interface: Our retirement calculator makes heavy use of charts. Because a retirement plan may cover a period of 30-40 years, simulations over such periods that are displayed graphically are far more effective than tables. Yet users who want numbers can get them by merely placing their cursor on the section of the chart for which they need numbers.
Retirement Planning Issues
The retirement calculator is also a tool for answering a large number of questions that arise in connection with retirement. Here is a partial list.
How Much Longer Must I Work?
Should I Take Social Security at 62 or 67?
What Rate of Return on Financial Assets Do I Need?
Should I Purchase a Deferred Annuity – if so, Deferred until When?
Should I Take a HECM Reverse Mortgage to Supplement My Income?
Should I Take a HECM Reverse Mortgage Now or Wait Until I am Older?
Should I Take a HECM Reverse Mortgage as a Hedge Against Outliving My Financial Assets?
These and other related issues can be assessed by comparing alternative scenarios. For example, the senior who is still working and wondering when to quit might do 3 scenarios, all using the same data except for the number of months that earned income will continue, which could be 0, 24 and 48. Similarly, the question of whether to begin drawing social security at 62 or 67 would be assessed by comparing scenarios based on these different assumptions. The bottom line in every case is to find the scenario with the more attractive pattern of spendable funds availability and estate value over future years.
Planning Evolves Into Management
Retirement planning doesn’t stop with retirement. Astute retirees will periodically update the value of their assets, the rate of return on assets, the value of their house and expected appreciation, and any change in their incomes. A projection based on revised values may cause them to change the amount of spendable funds they draw, and perhaps change whether funds are drawn first from financial assets or from a HECM credit line.
The calculator is implemented as an Excel spreadsheet (you must have Excel 2016 on a Windows PC to use it). You can download the spreadsheet by clicking on the link below: