Retirement Articles

Why You Need Retirement Calculator 3.0
Robert J. Phillips
Chief Retirement Consultant

As a recent retiree I had concerns regarding the ability to optimize my retirement income. I retired just before the recent market downturn and saw my savings falling dramatically. I wanted to understand how to maximize both my withdrawals and return when the market was falling. I also did not want to take unnecessary risks.

I knew the issue of withdrawing money during a down market is real because when the money is taken out of the account it is no longer available to help recover when the market eventually turns positive. In addition, I wanted to know what the best asset allocation would be to weather the storm of a down market.

There are only a few sources in the literature that deal with the issue of retirement withdrawals. These models tend to be extremely conservative. They severely restrict the money you can withdraw in order to be statistically certain that your money will last.

I was looking for a more realistic model for examining the impact of withdrawals on retirement savings accounts. I realize that there are no guarantees of future performance. Nevertheless an examination of past performance and a look at how major market downturns impacted that performance seemed like a prudent approach to understanding how to optimize my withdrawals.

We constructed the Retirement Calculator based on these historical scenarios. We examined the last fifty years of stock and bond performance. The calculator begins with the 1973/1974 market downturn and continues thru the most recent major downturn of 2000/2002. Both of these downturns were significant with stocks falling more than 40 percent.

The Retirement Calculator assumes you were unfortunate and began withdrawing money in 1973 for a period of 30 years. The calculator looks at various asset allocation strategies between stocks and bonds and shows you the optimum asset allocation for managing your money thru these downturns. It shows the optimum withdrawal rate so that your money has a reasonable chance of lasting a lifetime.

The calculator also includes additional features. The inflation factor allows you to adjust your withdrawals to compensate for annual inflation. For those who invest in mutual funds or employ a financial advisor a feature is included for reducing investment performance to account for the management fees that are included in these services.

The Retirement Calculator shows that using just the historical long term average return for market performance can lead to erroneous results. There is definitely an impact from withdrawing money from your account during market downturns. The greatest value of the calculator is that it shows you that you don’t have to live in fear of major market downturns. You can withdraw a significant amount from your savings even though the market is falling.

The calculator shows you that you can successfully withdraw significant amounts from your account by using asset allocation to weather those market downturns.