Background
There are an increasing number of sleek but simplistic retirement calculators out there, and most of them are basically the same. You put in your savings rate and overall asset allocation, and it crunches some numbers based on historical market returns to see if you can replace 80-100% of your current income in retirement.
Then there’s ESPlanner, which represents “Economic Security Planner”. It is based on consumption smoothing, an economic theory where the primary goal of financial planning is instead to avoid abrupt changes in one’s standard of living. Here is one graphical explanation:
This method has gotten some extra publicity because it often tells you that you need to save less money as compared to other calculators. However, since the software cost $149, I never really got to try it out. But now, they have released ESPlannerBasic, which is a slightly stripped-down but free version that everyone can tinker with. For example, it assumes that everyone will live to 100 in its computations.
You input various financial information like income and assets, and the calculator will give you a “spending and saving plan” for each of the rest of your life. I think the most important column is savings:
Saving is the recommended increase (reduction) each year in your regular financial assets. This saving is over and above your specified contributions to retirement accounts.
Sample Run of ESPlannerBasic
Let’s take a look at some of our results, using very rough numbers and a retirement goal at age 50. (Sound familiar?) Our “standard of living” has us spending $60,000 per year as a couple forever. During the next few years, we are supposed to save about $75k per year. (I specified zero future retirement contributions for simplicity, it’s all included in the $75k.)
Then at my chosen retirement age of 50, things change fast, with us starting to take large withdrawals from savings:
That’s be scary! Then, at age 65, the calculator assumes that Social Security will kick in, which almost has us at a zero savings rate.
Criticisms and Compliments
My thoughts on this calculator are pretty much in line with my thoughts on consumption smoothing in general.
For starters, I don’t like the idea of a calculator telling me what I should be spending in retirement. I like the idea of constructing this on my own, based on conscious decision making. However, the fact that the calculator chose $60,000 per year is creepy. Beforehand, I had already estimated my non-housing expenses in retirement at $24,000 per year. My housing costs are current about $36,000 per year. Add them up, and you get.. $60,000! Of course, at that rate the mortgage should be paid off after 29 years. Still, just an interesting coincidence?
In addition, the calculator gives very specific results based on what are essentially wild guesses. I have no idea if my income will stay the same, increase, or decrease. I have no idea if Social Security will change the full retirement age to 75, or if benefits will be means-tested. I have no idea what tax rates will be 30 or 40 years from now. So I’d take the results with a big grain of salt.
However, since the calculator is free, I can play with many different scenarios and see how different inputs change the given results, and this may help in my retirement planning. What are the most sensitive factors? I hope to try exploring this next.
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I thought John Bogle always thought that historical market returns don’t mean much unless once can explain where they came from?
You’ve stirred up a comment in me that shows my approach to life in general. These type of retirement calculator tools are useful, to some extent, for many people that stay “inside the box” and work and save and retire when the government says they can.
These type of tools aren’t very useful for the maverick, the independent thinker or the individual who defines retirement quite differently than others, and challenges the underlying assumptions.
For these type of individuals, retirement often isn’t a destination, it’s another part of the journey, perhaps a career change. And, most likely, they’re reading the handwriting on the wall that says “don’t count on the government.”
I raise my voice and remind many of us who are “standing in line” waiting for retirement that there are other approaches, and you are free to craft your life the way you want to. You’ll probably be better off doing so.
I assume the following:
– Social Security won’t be there for me (I’m 52).
– I’ll always keep my hand in some form of enterprise.
– Debt free is the way to be, long before retirement.
– No inheritance or other windfall will come my way.
– Energy and food self-sufficiency are key to cost reduction.
– Growing and tending independent revenue streams is a must.
I subscribe to the concept that there is no such thing as security, there is only opportunity, so I’m seizing the opportunity to take care of myself now in a way that makes sense to me.
Clair
Thanks for the heads up! I’d seen ESPlanner before but was also reluctant to shell out money for a principle I don’t really agree with in the first place. This should be fun to play with!
Thanks. There’s also a basic calculator at bankrate.com that I’ve always liked. It has options to kick in SS or not.
http://www.bankrate.com/calculators/retirement/retirement-plan-calculator.aspx
Mieu – Yes, check this post out:
Source of long-term returns?
Right now, I’d say the dividend yield is 3%, earnings growth depends on your outlook (5%? 4%?), and the speculative return is back to zero since P/E ratios are closer to long-term averages again.
Clair – Good points, it really is all about the assumptions of what you want and what you’re willing to do about it. It’s always hard to build something that will work for everyone.
What are the most important things for those with significant non-mortgage debt to keep in mind when planning for retirement? I’m looking for advice beyond the obvious – e.g., “pay off your debt.” Many people I talk to want to effectively plan, yet need to first strategize on their debt loads.
Jonathan,
Thanks for the update. I just read Spend ’til the End a couple of weeks ago and liked the consumption spending idea so much that I went out and got ESPlanner. I’ll take a look at the basic version to see if I can recommend it to friends when they cave in to my constant yammering about consumption smoothing. 😉
Many people won’t find the tool useful, but I’m actually looking forward to spending more time with it. The idea of taking all known inputs and outputs, along with best guesses at economic variables, and coming up with a number I can then work with, appeals to me.
I understand your concern about the calculator spitting out a number for you that you can spend in retirement, but I think this tool requires the user to have their own understanding of “consumption”. For me I want to put as much as possible in as “special” – 1 vacation every other year while the kids are at home and 2 smaller vacations a year while we are under 80 and then no vacations, or the purchase of an RV when we retire, or taking up an expensive hobby instead. The more I can plan for and the more I decide what my retirement will look like, the more the consumption number then becomes that amount that it doesn’t matter what I do with it. And once it is all in there I can simply make copies of the scenarios and start playing with what it would take to retire 2 years earlier, or 5 years, or 10 years.
One suggestion I’ll be making to the ESPlanner developers is to add the capability to load the future economic assumptions either from downloaded files or through a web service. This way the user can load various profiles of future assumptions for comparison purposes, and they can find a source for these assumptions that they trust.
We sold everything last year and now live in an RV. At 54 and 51 we are getting by although with the economic train wreck it’s all nip and tuck.
My favorite calculator by far is:
http://fireseeker.com/
Their website and forums have tons of brain food too.
I retired at 59 and it was tough even with benefits such as health insurance group. I gardened for fun and raised Jeruselum artichokes and tomatoes and lived off of my HELOC and selling a rental property that wasn’t yielding that much.
Six years later I”m still saving dollars, going to Dave Ramsey courses, and living in my best rental property. With children, divorce, health problems — people are just going to have it tough for a long while.
You really must have your home paid for by the time you retire. It is the only way. If not paid for, at least a 10-15 year mortgage. Live in a 2 bedroom in a decent neighborhood but own your castle. Be debt free as well.
Just wondering about the “65” age cutoff in the chart. I guess that doesn’t apply to social security, but some other retirement investments that you’ll be using right? I know you’re younger than me, and SS won’t kick in for me until 67. But I guess we are allowed to withdraw from other retirement plans at 65 regardless — (no tax penalties?). Do you think that could change?
We love planning tools. It seems like each one provides a slightly different perspective due to what factors they take into account. I also noticed that some of the Monte Carlo Simulations are a tad more optimistic but historical data is what it is.
My favorite calculator by far is:
http://www.retirewithless.com/
It’s easy to use and fun to play with…