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Retirement Calculators

Recently in an article about my take on Early Retirement I talked about sequence of returns and costs as a reason why I am not considering early retirement. Well, it just so happens that there is a crowd sourced tool available that really illustrates this point. Many of you may already be familiar with the tool known as Fire Calc and thus may want to skip down a few paragraphs. For everyone else a brief primer on retirement calculators:

FireCalc is a free crowd sourced calculator populated with the returns over every time period starting in 1871. The idea here is the tool gives you a picture of what likelihood, based on all of the prior performances of the US, your current investments would have of surviving the length you specify given the spending you specify. You can do something as simple: I have 1 Million dollars and I spend 50K a year, what is the likelihood of the money lasting 30 years? The tool will show you lines representing the amount the portfolio would have contained every year of that 30 years until expiry based on any starting point from 1871 to present. This calculates the likelihood of failure based on the prior performance of the market.

You can also add things like social security and pensions, adjust how the spending changes over time (based on inflation, based on various reduction studies, and based on a percentage of remaining portfolio), adjust your asset allocation across the US market, or with a consistent annual returns/random performance base on your own market return assumptions.  Finally, it will allow you to work backwards from these assumptions to give you portfolio sizes needed based on your desired probabilities of success.

Vanguard Monte Carlo Simulator

Vanguard also has a retirement calculator. This one uses Monte Carlo Simulations. It uses returns in a database just like FireCalc.  However, instead of calculating from different starting points it randomly chooses a return to represent each year’s return.  This mapping is based on all prior year returns for an investment class. It proceeds through this for the number of years you outline. This becomes one possibility. It proceeds to run through this same simulation 5000 times and the result provides the probability of success.

Mathematical Limitations of Retirement Calculators

Both tests are very cool and a lot of fun to play with.   Mathematically, they both have many positives plus two negatives based on assumptions.  In the case of FireCalc the system gives you every previously existing scenario of a series of prices for the number of years you pick.  The issue is that it assumes the series of prices will follow the same series produced sometime in history.  This means there are only about 116 previous outcomes to compare to for a 30 year period, which is admittedly a small sample size.  

Vanguard solves this by assuming that the prices of any given year are more representative.   Thus they randomly select each years return into a series.  It does this for 5000 iterations which is a better statistical approach.  The issue here is that each year is treated as an independent random event, which ignores the tendency of the stock market to have momentum (move in the same direction over a series of years).

Retirement Calculator Usage Limitations

Beyond mathematics both have some serious blind spots that require them to be used carefully. First and foremost, prior performance does not necessarily indicate future results. Each one of these calculators assumes that future investment performance will have some commonality with past performance of the US market. This is not necessarily true. In fact, if we look at the Japanese market over the last 25 years we see performance of which the US has never experienced.  The Japanese market is still down from it’s peak in 1989. Now, I will admit the likelihood of this with a balanced worldwide portfolio is low, but it is not impossible.

The Nut Behind the Wheel

My bigger fear about these retirement calculators relate to the inputs themselves by the “Nut behind the wheel” so to speak. First, we have the asset side.

When you input your assets into these tools, one thing commonly not accounted for is pre tax and post tax money. This will have a huge impact on your results.  1 million in a Roth IRA at retirement (post tax) is not the same as 1 million in a 401k (pretax). After the tax man’s 25% bite, you’re really looking at an investment of $750K. Furthermore, while we’re on the subject of taxes, they change.   There is a possibility somewhere over your retirement, especially for those retiring early, that tax laws could change considerably. One such option often talked about is a wealth tax. Depending on how these are structured your portfolio could take a significant hit.  There are some tax mitigating strategies you can take, but it is unlikely your tax rate will be zero.

Retirement Expense Assumptions are Complicated

The other input that concerns me is expenses. Cost prediction based on current spending is common in the personal finance world.  However most real world retiree spending studies are based on those retiring at or near 65. These do indicate a reduction in cost with age. There are not very many studies of what happens to spending for someone who retires somewhere between 35 and 55.  One would hope it will stay at a given level increasing by inflation only. However, there are many unknowns: future health care costs, insurance costs, inflation, etc.  These may lead you to under estimate.

This post is not meant to scare. Chances are high that a prediction from one of these retirement calculators will predict the actual outcome. Also, chances are good that those who are truly committed to cost reduction and early retirement will overcome these risks. I strongly advise if you go this route to build in a cushion to the prediction and a backup plan. Anyone interested in personal finance should take some time to play with these tools. It will give you an eye opener to how much or how little (depending on your perspective) you will need to retire based on past performance.


  1. Mustard Seed Money
    Mustard Seed Money September 27, 2016

    Thank you for sharing. I will definitely play around with both of these. Through Personal Capital I have been able to them tell me based on Monte Carlo simulations how close I am to achieving my retirement goals but it will be nice to play with these calculators. Thanks for sharing.

    • October 2, 2016

      Thanks. There are definitely many tools out there from various providers. It’s always good to see it from multiple angles as each one makes a different set of assumptions.

  2. Chris Haas
    Chris Haas October 31, 2016

    Curious to hear your thoughts on the possible reality of a wealth tax. Such a tax would be be double jeopardy in my opinion and very difficult to enforce as people would hide physical cash. My magic # is more of a limit on retirement account value. I think say 20 years or so from now a magic # like 2 or 3 million as a cap will limit future contributions.

    • October 31, 2016

      I do occasionally worry about a wealth tax or something similar. That being said I think it’s more likely we’ll see them going after retirement accounts with balances above a certain point. I could see Roth IRA with a target on its back due to backdoor Roth for example. From what I’ve seen the government tends to be a little more exact (and thus illogical) with taxes. I do the only thing I can, try to diversify across account types in the hopes that I can minimize the impact.

  3. Buck Wampum
    Buck Wampum June 4, 2018

    Another thing to consider is means-testing of SS payments. That’s where a large Roth balance helps, as Roth withdrawals are not income and are not means. If the government is going to change the rules, you can bet you’ll have time to drain your Roth accounts and make that money disappear. The death trap is the pretax 401k or traditional IRA. if the government changes the rules, you can’t make a total withdrawal without sinking into tax oblivion.

    A friend of mine got laid off from corporate America at age 51. With $2MM in a brokerage account, he was able to keep his income so low (only cap gains and dividends) that his kids were eligible for CHIP. I laugh when I think about it, he didn’t write the rules, but if the government wants to put a big loophole in there, then go for it.

    The Achilles heel of the Roth/brokerage account taxable income strategy is a VAT. That will screw things up royally. Again, odds are there will be advance warning, so you can hide money before it hits. I also bought timber property and farmland. Fields can be rented and timber sold, for cash. A farmer friend of mine did that for years and that was a lesson I took to heart.

    • FullTimeFinance
      FullTimeFinance June 11, 2018

      Diversification is the key. I’ve considered Timber or Farm land a few times but never jumped in. Any desire to write a guest post on timber?

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