Retirement Planning Calculator: Some more thoughts

by Manshu on September 30, 2009

in Opinion

Last week I wrote about the things to keep in mind while using a retirement planning calculator, and since then I have a few more thoughts on some of the variables that go in there.

A retirement planning calculator will normally give you two rate of returns to input. One is the rate of return you expect before retirement, and the second is the rate of return you expect after retirement.

There are two different rates because normally as people grow older, they move towards less risky investments. If you assume less risk, then your returns will also go down.

If you are already retired, then possibly all your investments will be fixed deposits or government bonds, as opposed to stocks or equity mutual funds which have more risk.

This is kind of obvious, but I’ve seen that a lot of retired people, most notably, my own grandpa invest in a lot of stocks. His pension and other fixed income takes care of all of his necessary expenses, and still leave him a surplus. So, he really has no fear about investing in the stock market because even if he loses that money, it won’t hurt him.

I mention this not to say that you should expect to earn a higher rate of return during retirement, but to emphasize that not all expenses are equal, and thinking about your current expenses as needs and wants is a good way to get in the mold of categorizing these expenses.

The second thing that really struck me is also a bit obvious, but really: what a difference age makes. No one I know who is in their twenties is contemplating about their retirement. A very few people I know in their thirties are actually contemplating their retirement. A few people I know in their forties are contemplating their retirement, and almost everyone I know in their fifties is thinking about their retirement in one way or the other.

Almost everyone retires, but very few plan for it, and a minuscule percentage plan for it really early. And yet, planning early makes a lot of difference.

Plug in some numbers in the retirement planning calculator and play with the current age. You may not be amazed to see how much difference it makes because you know how compound interest works, but when you think about its implication with respect to retirement planning, and how you are not doing it, you may be amazed.

{ 7 comments… read them below or add one }

Mark Wolfinger September 30, 2009 at 5:51 am

The amazing part to me is that this is amazing. Everyone ought to be familiar with the concept.

Teaching high school students about compound interest ought to be mandatory. And not just ‘teaching,’

The numbers must be made to be REAL so the students see how it applies to them. I understand that poor kids will not see relevance to their lives, but if they just get the idea that buying stuff they cannot afford and then paying interest is a bad idea, it will may a significant difference.

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Manshu September 30, 2009 at 6:30 am

Everyone (or at least most) do learn about compound interest but not the concepts of retirement or other such PF things.

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Jessie September 30, 2009 at 9:07 am

A twenty-something here who loves retirement calculators! I’ve been saving money in RRSP’s for years now. Always a small amount, but when I’m ready to retire in some 40 plus years – i’ll be ready for it.

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Manshu September 30, 2009 at 1:48 pm

You must be one of the rare early early starters 🙂

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ctreit September 30, 2009 at 6:17 pm

This post also shows that retirement planning is a very imprecise science if we even want to call it science. 1) The two rates won’t change abruptly. There is more of a slow switch into lower rates as the asset allocation gets adjusted gradually towards generating income. 2) If one expects to spend a bit of time in retirement one should not even switch to a more cautious stance too early.

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Manshu September 30, 2009 at 7:11 pm

That’s a good point you make. Is there any retirement calculator that allows for such a gradual transition?

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ctreit September 30, 2009 at 8:14 pm

I don’t know what other calculators do, but we built such a gradual switch into our calculator. Nevertheless, I think that a retirement calculator’s main benefit is setting up a retirement plan and checking up on it periodically. I don’t think that small mathematical imperfections hinder the process of retirement planning that much.

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