My Personal Finance Blog

JLP over at AllFinancialMatters made an interesting post regarding Monte Carlo simulators and their use in retirement planning. I’ve been looking for some more tools like this (I have a couple of Excel spreadheets but they are hard to use…)  Broadly speaking, Montey Carlo methods are useful for modeling systems with many variables (like retirement planning). It is a bit more realistic way of looking at retirement planning than your standard 8% average return per year method. Check out JLP’s post for more links and info.

Per JLP’s suggestion I downloaded the retirement calculator from Pivot Point Advisors and spent some time with it tonight. It belongs in my Financial Information Resources category so here goes…

Site: Pivot Point Advisors’ Retirement Calculator
Provider: Pivot Point Advisors
Type of information: Retirement planning tool.
Languages: English
Synopsis: Java based retirement calculator which uses Monte Caro simulation techniques to give a (hopefully) more realistic picture of your retirement assets.
My Ranking: 4/5 - Interesting tool… I spent a couple of hours keying in our cash flow data, our assets (undervalued the house since I doubt it will be increasing in value for a while) and trying various combinations. The program (which is written in Java btw) looks at historical return data and combines it in several ways. It then displays various outcomes, one where 5% of outcomes are worse, another at 20%, 50% (the expected outcome), 80% and 95% (optimistic). For my own use I was really only concerned with the 5% outcome as I don’t wish to take many chances with our retirement.

I made a couple of assumptions including my wife finding a job at at least 1/2 her former salary by the beginning of 2007, our expenses decreasing very slightly from the past six month’s trend and a 70/30 stock/bond split for our investments (which is not where they are at right now). It looks like we may be able to quit our jobs in 2012 and move on to what I refer to as my retirement career. What this means is we’ll be working at jobs where money is of secondary importance The assumption I made was that we’d earn $40k per year combined starting in 2013. We could probably work fast food and do that, but my hope is we’ll find something interesting and socially positive to work at for approximately ten years past our ‘retirement’. This all means that I get to ‘retire’ from the rat race at 44 which is far better than my previous plans had estimated. Going to work just got a lot easier…

I must warn you that the tool is somewhat simplistic. For instance it assumes all your savings from this point forward are post tax which would not be the case in reality. The interface is also a little hard to get used to but once you’ve played around with it isn’t hard. Try it out and see where you might end up!