welcome to this issue of retirement Crusaders today we'll talk about retirement calculators and how to use the right one to get the best and most accurate results now the retirement calculator that most people use are the free ones on the sites of mutual fund companies for example so here we are at the site for Vanguard funds now most of these mutual fund companies have these calculators on their site and they're all pretty much universally terrible they're simple they're things like you put in your current age when you want to retire how much you make each year how much your savings how much you've already saved let's put in here a million that you'll need 85 percent of your of your current income for in retirement and how much you expect to earn per year and then you click calculate and it gives you some kind of simplistic output like you know this is how much you have this is how much you need and it shows your shortfall okay well this is simplistic because it's just bad and it's bad because it's simplistic so you want to use what's called a Monte Carlo calculator much much better this one uh there's a free version on the site portfolio visualizer.com and let's walk through this and see how this works and you're going to see instantly why it's a much better retirement calculator to use so it starts off with it asks you about your portfolio and it asks you to either enter asset classes you know like a large U.S stocks or U.S bonds or International stocks so various asset classes uh and you would enter them down here so for example you'd say okay I've got you know 30 percent of my money in U.S stocks and I've got um and you could be more specific let's say let's change this to large cap and let's over here just say we've got 30 small cap and let's say we've got 40 percent in U.S bonds so the typical 60 40 split so that's what we're going to use now if you wanted to up here instead of asset classes you could actually have selected tickers and put in the symbol for each of your stocks and bonds in here and the percentage of your portfolio so and in fact you could go a step further there's a version of this where you could actually upload your specific portfolio so you could I'll show you that a little bit later so let's go back to the asset classes let's put this in again let's make this simple U.S stock market 60.

Let's put in U.S bonds for 40. okay and we'll go forward with that next thing it says how much are we starting with in our retirement portfolio cash flows now if you want to you can um there's a number of choices here you can say look I'm not making any contributions or withdrawals to my retirement assets or you could do something like you want to withdraw a fixed percentage so for example those people who use the four percent rule you could put four percent in here and in fact you could get very detailed because if you wanted to you could import a spreadsheet with all your cash flows year by year how much you'd be adding to your portfolio how much you'd be taking out so if you know you have some large withdrawals coming if you know you want to buy a boat in year four you could upload those year by year cash flows into this calculator which makes it really great to make sure you get notified of additional educational videos to show you how to have a better retirement make sure and hit the Subscribe button below and the bell icon so that you'll get notified when we post a new video and you log on to YouTube but for now let's go with the withdrawal fixed percentage periodically and we'll say uh four percent annually now obviously if you want to withdraw money monthly you could change this to monthly just remember you would have to divide this four percent by twelve to make sure it comes out right so right now we'll leave this as annually simulation period That's the number of years let's just leave it at 30 for right now which is the typical span of the average retirement tax treatment let's use after tax returns because you'll be paying taxes now just a caution here the withdrawal percentage here if you want say on a million if you want forty thousand to spend and let's just for example assume all of it was in an IRA you'd really need to take out say five percent a year from the IRA in order to get whoops in order to get four percent spendable right or maybe uh five and a half or six percent depending on your tax bracket so just keep that in mind that this assumes yours that we're spending money that's already been taxed after tax returns and it will take out taxes for any income that's earned on this money okay investment time Horizon let's just leave this is Perpetual here we've got to put in our federal income tax rate let's put in something um typical not even that much typical retiree it's probably 22 percent capital gains tax for that person will probably be not more than um 15 at most probably zero percent for a lot of people dividend tax let's put in 15 Affordable Care that would only apply to very high income earners so let's leave that at zero and let's say your state tax comes to four percent a year next we can select the simulation model here now I'm going to leave it as statistical returns which means it looks at the history of these asset classes U.S stocks and U.S bonds and uses the average rate of return with the average standard deviations per year and then simulates a 30-year period of returns for those asset classes so let's leave that in statistical returns now if you wanted to for example if you thought the returns in the future might be very different than they've been in the past you could click here and say forecasted returns or even get very more detail parameterized returns you can get really detailed with this if you want to so I'm just going to stick with the statistical returns the time series model I'll stick with the normal returns if you're a real statistical head you could read up what the garch model is some people who are really into stocks and the the mathematics of stocks might pick the garch model let's keep things simple for now U.S full history yes we'll use that if you so this question here is if you thought that things were were different say over the last 20 years and might be more representative of the future you could instead hear to instead of full history say no and then it would say what years do you want to use as the history on which to base forward returns so you might think for example that from 19 from 2000 to 2021 is more representative so let's do that I'll click no for this and we'll use these years as more representative of the future sequence of returned risks now this is a big issue in retirement planning which is if you retire and uh your first few years years say one two and three have a declining return in the stock market or negative returns in bonds that can really really hurt your retirement much more so than if that happens in years eight nine and ten of your retirement so a lot of times people want to know the worst case and what you can do here is where it says sequence of returns you could actually put in worse three years first so when it looks at the returns of stocks and bonds over this 21-year period it will tend to put the worst years into the first three years of your forecast so this is kind of cool that you can even do this because it lets you do a worst case analysis so for right now I'll tell you what let's leave it at no adjustments we'll assume that that the returns will occur pretty much like they have in the past kind of randomly all right inflation model we could pick historical inflation which has probably been somewhere two three percent a year you might think okay over the your retirement inflation might be higher so you can instead pick a number maybe you think it's going to be four percent and then you think it can have a three percent variance like as high as seven four plus three would be seven or four minus three would be one you think it'll vary within that range so if you want you could pick your own inflation indicator here um I'm going to actually just leave it at historical let's assume you're going to rebalance your portfolio annually meaning as your portfolio during the year gets out of whack say at the end of the year it's stocks are now 70 percent and bonds are 30 percent that you'll rebalance back to this uh ratio at the end of each year so that's what the rebalance annual is you could of course choose monthly or quarterly Etc uh intervals leave this as defaults you'll see what that means in just a minute all right so let's see I think we filled in everything we want to fill in let's run the simulation okay so now well that was pretty darn fast all right so here's the beauty of Monica Monte Carlo simulation Monte Carlo simulation results for 5 000 portfolios so in other words in those two seconds we were waiting for the results it took the history of stock and bond performance over the 21 years and said okay one year stocks did 10 and bonds did eight but they because of their standard deviation stocks could have done nine in bonds four and and so it it tried 5 000 different permutations of possibilities in the future now tell me that that's not a lot better than that calculator we saw on that on that Vanguard website where you just put in some simple numbers and it came out with one result so this is much more I'll use the word scientific I'm I'm hesitant to use the word accurate but much much more scientific way of planning your retirement because it gives you a much greater sense of reality all right so let's just go through this for a minute so we see you tried five thousand times it used the the inflation data for this period 2021 it use stock market returns it all the things we put in four percent annual withdrawals Etc okay so here's what it tells us it gives us bands meaning look if if you your performance was only in the 10th percentile meaning of everything that could have happened your results were in the worst ten percent the bottom 10 here's what would have happened you would have had a a Time way to return on your portfolio of 3.9 percent a year your million dollars you would have ended up with 930 000 at the end of 30 years you're after inflation it would have had purchasing power of six hundred and forty three thousand your worst year you would have lost 46 of your portfolio the safe withdrawal rate it shows you to to make sure that you would not have exhausted your principal your safe withdrawal rate would have been 3.9 percent a year okay uh you know in the worst case uh don't worry about this number it's a little confusing what they're telling you here now in the 50th percentile so half the portfolios or half their scenarios did better half did worse your average rate of return was a little over six percent you end up with a million seven you could have taken 5.55 percent a year from your portfolio not just four percent so it's telling you you could have taken more and still not have exhausted your portfolio here we can see this visually so each one of these lines is one of those we can see the bottom line in purple is the 10th percentile the worst case you know one out of ten portfolios would have done this poorly and then we can see the top the 90th percentile shows us the portfolios that word would be in the top 10 percent of performance so we can see for example this portfolio after let's go to 15 years here okay if you were in a 90th percentile you'd want your million would have already grown to 2 million by the end of 15 years if you were in the 10th percentile you know the worst portfolios your million dollars would now be to 842 000 and then as we move along here it shows us here we are at year 30 and you can see that the worst bottom tens percentile you still had nine hundred and thirty thousand dollars okay so this projection based on the numbers we put in this tells you look even the worst and the best case your worst case still leaves you in pretty darn good shape so that can give you a lot of comfort now obviously your numbers may not come out this way but this gives you an idea of the beauty of Monte Carlo simulation is that in 5 000 Trials of different possibilities you get a much more realistic sense of a range of what could happen best case and worst case now let's go down here these are simulated withdrawals we see that in the 10th percentile the worst case even though you would have started out withdrawing uh forty thousand a year uh four percent a year that four percent would have been down to thirty eight thousand you know out here you know at your 30th year whereas if your portfolio was in the 90th percentile you're four percent a year would have grown to a hundred and thirty nine thousand dollars okay and now we see the same thing in terms of inflation adjusted and what we see that the bottom 10th and 25th percentile oh also the 50th on an inflation-adjusted basis see notice these are all trending down from the zero one from the Forty thousand these are all down this shows us on an inflation adjusted basis the average portfolio the one in the 50th percentile would not have quite kept pace because on an inflation-adjusted basis by your 30th year you would be down to a purchasing power withdrawal of thirty six thousand dollars per year rather than the 40 000 you started with so uh this does give you a cautionary note that on an inflation-adjusted basis you may not do so well to make sure you get notified of additional educational videos to show you how to have a better retirement make sure and hit the Subscribe button below and the bell icon so that you'll get notified when we post a new video and you log on to YouTube as a practical matter I wouldn't be worried about this If This Were My forecast here's why we did another video where we showed that as people get later in their retirement years say to age 80 and 85 their expenses really start to go down quite a bit there's less travel there's less luxury purchases and so in fact in your later retirement years that four percent that you started with even if it's down some should be perfectly okay and that's why this chart doesn't really concern me okay so this is an idea of what you get when you do a Monte Carlo simulation now you could of course go back here and now make changes and it'll take your changes and what will it do it'll run another 5 000 portfolios based on your new changes so you could do this a number of times and come out with really really rich results and this calculator is absolutely free they do have paid versions it I don't know if you need it you get some extra things here you know customized reports and all kinds of fancy things that you can put in this may be for some people what I don't like about this most software nowadays they want you to pay overtime you know they want you to pay for usage there's however I found another Monte Carlo simulation software where you can download you don't have to pay you can download it and that way you don't have to pay each month I don't know if this one is as powerful but this is another example it's probably not the only one whether you use this one from portfolio visualizer which I think is perfectly fine or you try this one that you can download and then you'll have the software yourself and never have to pay for whatever features it offers either way please please please use a Monte Carlo simulation software in order to plan your retirement and stay away from those ridiculous and really poor calculators that you find on mutual fund websites and other sites where it's sloppily put together and shouldn't really be used by anyone see you next time on retirement Crusaders [Music]

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