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Discussion Starter #1
I'm very curious about this - what retirement income calculators do people in this forum use? (Do people in this forum use retirement income calculators?)

Tell me about your favourite. Or, if you haven't got a favourite, tell me what would make a retirement income calculator a favourite one for you. (I am not developing a retirement income calculator...)
 

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I may have mentioned this before, but it bears repeating. My mother went to high school in the thirties. She kept an old textbook which she would refer to occasionally. It consisted of 3 tables.... 'sinking fund', 'annuity' and (I think) 'future value'

Based on what you wanted to do (determine how much you should save paycheck to paycheck to achieve a certain retirement, or based on a particular saving amount, how much you could look forward to in retirement) as well as varying your retirement age, interest rate etc.... you could do a lot. Mind you, taxation wasn't a major part of the investment process then, nor was inflation nor CPP/OAS, however, use of the 3 tables was taught in high school home ec class.

This is before we had computers or calculators.

My other comment relates to this fact.... the math behind the time value of money, taxation and inflation is pretty much set in stone. Why then does each retirement calculator give different results? After all, based on the same T4/T5 data, Quicktax will give the same answer as its competitors, the various brands of financial calculators will give the same answer for PV....

Food for thought.
 

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Discussion Starter #3
How did I know you'd be the first to respond? ;)

I am not so much interested in "how to get it right" (I know how to read a sinking table and I actually have my grandmother's "Home Economics" text from the 1920s with similar info) -- I am interested in what people use, and, if people give me links, I'm interested in seeing whether randomization is a factor and, if yes, whether Monte Carlo is used and, if yes, what MC model is used.

Thanks for the food for thought, though. This is my main area of interest right now, and I'm doing a lot of thinking.
 

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I tend to use 2 calculators as "sanity checks" against each other: http://www3.troweprice.com/ric/ric/public/ric.do AND http://www.firecalc.com/index.php

The former is American, but I use it with modifications that work for my circumstances. The latter I picked up at this forum actually.

I am close to retirement (within 5 years) and pretty much financially ready. I use these calculators to answer the question: what would be the lowest amount my retirement savings portfolio could fall to trigger "red flags" that I could outlive my savings? Of course you have to put in the relevant assumptions.
 

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Discussion Starter #7 (Edited)
Oh - and different results from different calculators - I presume the main factor is the varying, critical inputs to the calculators, namely expected return and expected volatility for asset classes. Right?

Edited to add: several hours went by between my composing this and hitting "enter," during which my five-year-old commandeered my computer to watch "Robots." Thanks for the additional responses!
 

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Oh - and different results from different calculators - I presume the main factor is the varying, critical inputs to the calculators, namely expected return and expected volatility for asset classes. Right?

Edited to add: several hours went by between my composing this and hitting "enter," during which my five-year-old commandeered my computer to watch "Robots." Thanks for the additional responses!
The ones I use don't ask anything about asset classes - just expected return. The 2 main differences that I can see with the 2 I use is that retirement advisor only gives the choice for DB pension as being indexed and not indexed and The Pension Puzzle lets one put in a specific indexing rate. I use 0 indexing for both calculators.
 

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I had a user who had been in the biz for eons. His claim was that MC had gone through several up and down cycles over the years. It had its resurgences whenever markets were down. His thought was that when the client came to see him in a down market, he needed a distraction, so he hauled out the MC calculation. In order to do something other than make excuses for the sorry state of his client's portfolio, he would get into risk analysis. This gave the client some needed perspective, as well as establishing the planner's credibility. Unfortunately, once markets went up again, MC took a back seat.

BTW, MC has been around for ages in engineering and economics as well as PFP. Back in the 60s, I can remember building an MC model.... Fortran always had an RND function for exactly that purpose.
 

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Which Retirement Calculator

When all is said and done, I find it best to create an Excel spreadsheet which considers all sources of income (columns) plotted against age (rows). Excel allows you to duplicate the spreadsheet and apply different scenarios to each sheet (rate of return, inflation, decisions on when to apply for CPP, etc.). Each scenario should apply one or more aspects of income or expenditure risk. Focus on RISKS !!!

What was most enlightening to me was the option for early application for CPP (since CPP has some inflation protection built in). In my case it appears best to delay CPP if it is not needed before 65. This results in a higher percentage of inflation protected income after 65. Others needing the CPP before 65 have reduced inflation protection in actual dollars due to the reduced base amount of the payout.

I then compare and correlate my spreadsheet to various calculators out there. I assume that my costs will vary by age. I want to travel when I am physically able to do so. I amortize my automobile costs every year. However, I don't plan on needing money for a new car when I am over 85. I also do not want to leave a large legacy. My will should include the phrase "being of sound mind, I spent it all".
 

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What was most enlightening to me was the option for early application for CPP (since CPP has some inflation protection built in). In my case it appears best to delay CPP if it is not needed before 65. This results in a higher percentage of inflation protected income after 65. Others needing the CPP before 65 have reduced inflation protection in actual dollars due to the reduced base amount of the payout.
Well, not exactly. The other issue you must consider is life expectancy and the matter of net to your estate. When you run the numbers, track tax properly, and compute what your estate will net should you die prematurely, then taking CPP at 60 can make sense if you know you may die early. Tax and life expectancy have a major bearing on determining the time you elect to take CPP,
 

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If it were applicable to Canadians, I would use ESPlanner:

http://www.esplanner.com/

It calculates a sustainable living standard for you, and then figures out a lifetime plan that you can follow to maintain that standard. This seems like a really smart approach to retirement planning and personal financial planning in general, but unfortunately it's oriented entirely to US customers. It would be great if someone could create a Canadian version but it probably won't happen as the potential market here is too small.
 

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Discussion Starter #13
Ah, yes; lifecycle economics. A fantastic approach; one I am really interested in - including how to adapt Kotlikoff's thinking to Canada and how to implement a similar system for Canadians.

Take a look at the "Life-Cycle Income Smoothing" calculator here for some capacity to play around with income-smoothing. (And PM me if you have questions about that calculator...)
 

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How does it handle income tax? I didn't see much emphasis on tax accuracy and time. RRIFmetic seems to cover a lot of the issues they mention... changing jobs, retiring early, opting for early/late CPP, varying lifestyle, opting for TFSA, rrsp/nonreg, RESP, loans vs RRSP, leaving a specific estate....
 

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Discussion Starter #15
Steve - if you are referring to the QWeMA calculator, the answer is "it doesn't." If you are asking about the ESPlanner calculator, I don't know the answer. And yes, I concur, RRIFmetic is a good choice for income-smoothing, too.
 

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FYI, it looks like ESPlanner can be adapted to work in Canada and for various expatriate situations (interesting to me because I'm a dual citizen), although the approach isn't particularly elegant: here's a note I found in the help forum:

You can run ESPlanner turning off U.S. taxes and Social Security benefits. You simply specify that you live in any state in the U.S. and then go to the tax and benefits assumptions screen and specify that starting in the current year federal and state payroll and income taxes as well as Social Security benefits will be cut by 100 percent.

Having done this, you need to enter the government pension you expect to receive from your country. You can enter this pension in the pensions and annuities folder.

You also need to enter your future projected tax payments as special receipts. Alternatively, you can enter your earnings and rate of return net of taxes.

Suggestions for the following US/Canada expatriate situations:

1. Americans in Canada
- Disable the US tax calculations by reducing US taxes and Social Security taxes by 100%
- If you are entitled to CPP benefits, enter CPP as a pension NOT covered by Social Security employment. This will allow you to take advantage of ESPlanner's Social Security calculation engine to determine any Social Security benefit you are eligible to receive less the Windfall Elimination Provision for CPP. Index CPP fully to inflation.
- If you are entitled to OAS, enter OAS as an annuity indexed fully to inflation.
- Run the ESPlanner reports with no Canadian taxes. Copy the non-asset income and retirement account withdrawals for each person from the spreadsheet and apply Canadian taxes to it at regular rates. Copy the regular asset income from the spreadsheet and apply a rate appropriate for your asset mix (interest, dividend and capital gains... here I am conservative and use the tax rate for interest, since it is the highest). You may want to tax only 85% of your Social Security benefits at this point (I don't since I want easier calculations). Finally, take the Canadian tax amount you calculated for each year and put it into ESPlanner as special expenditures. Run the ESPlanner reports to get your results including Canadian taxes.

2. Canadians in the US
- Enter CPP benefits as described above.
- Enter OAS benefits as described above.
- Let ESPlanner calculate your US taxes and social security benefits. The Social Security calculation engine will take into account your CPP benefit and adjust for the Windfall Elimination Provision.
 

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Arrgghh. The issue of tax is much too important to approximate it this way. Canadian taxation involves too much uniqueness.... OAS clawback, EI&CPP withholding, dividend tax credit rules (prov&fed), age credits, levies, indexed brackets, GIS clawback, charitable deduction math....
 

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True, although there are so many approximations involved in retirement planning that sometimes I wonder if it's worth the effort.

For example, you have to estimate future inflation. How can you do that with any degree of accuracy? And of course you also have to make assumptions about the future rates of return on your various investments.

Really what we're doing in retirement planning is projecting scenarios based on a set of assumptions. If our assumptions are wrong, the scenario won't play out. You could perform sensitivity analyses to see what variables will rock the boat the most.
 

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I guess that's why they call it 'planning'. My approach is to start with the known parameters (rules of taxation, clawbacks, rrif minimums, LIF/RRSP maximums, etc) and vary external parameters such as rates (maybe varying over time), various inflation estimates, etc.

The bottom line is that the subject should be able to run through the calculations/arithmetic (including income tax) and verify the numbers are correct. This not only validates the plan's integrity, but (if it is used by a planner) it enhances the planner's image in the eyes of his client.
 

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I guess that's why they call it 'planning'. My approach is to start with the known parameters (rules of taxation, clawbacks, rrif minimums, LIF/RRSP maximums, etc) and vary external parameters such as rates (maybe varying over time), various inflation estimates, etc.
My point is that today's known parameters are not necessarily tomorrow's: tax laws change, opportunities change (who five years ago would have predicted the availability of the TFSA?), etc.

If you incorporate all the details you mentioned ("OAS clawback, EI&CPP withholding, dividend tax credit rules (prov&fed), age credits, levies, indexed brackets, GIS clawback, charitable deduction math") into a retirement planner, you run the risk of creating an illusion of accuracy based on precision. The probability of a given projection matching future reality is pretty slim, and I wonder if it's worth the effort to get down to that level of detail -- it gives people a false sense of control and security.

I wonder if a better approach would be to focus on increasing resilience: making sure you have enough of a nest egg, diversified enough to spread your risk, so you can handle pretty much anything the world throws at you? It's kind of a throwback to the simple "save as much as you can" approach, which creates the risk that you'll save too much and deny yourself a better life during your working years, but it might be the most effective strategy in the end.
 
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