#### Field Work

### January 31, 2019

## How Long Will Retirement Savings Last?

It might be the most consequential issue baby boomers will deal with when they retire: did I save enough?

Vanguard’s free online calculator will estimate that for you, using the same sophisticated technique financial advisers charge hundreds of dollars to provide.

The user-friendly calculator uses 100,000 of what are called Monte Carlo simulations of potential future returns to the financial markets to arrive at the probability that a household’s invested savings will last through the end of retirement. To get to this number, older workers enter their information into the calculator – 401(k) account balance, asset allocation, estimated years in retirement, and annual withdrawals – by moving around a sliding scale for each input.

The financial industry recommends aiming for a probability in the 80 percent range – 95 percent is overdoing it. In the end, however, your comfort level is a personal decision.

An important purpose of the calculator is to demonstrate how changes in the inputs can hurt one’s long-term retirement prospects – or improve them. One obvious example is increasing the annual withdrawal amount, which lowers the probability the money will last. To increase your chances, try a later retirement date.

The calculator is a lot of fun, but it has some limitations.

First, it’s no substitute for a detailed pre-retirement financial review. The other issues are primarily mathematical, and they boil down to the difficulty of predicting the future.

The calculator assumes, for simplicity, that a retiree withdraws the same dollar amount from savings every year to supplement Social Security and any pension income. But Anthony Webb, an economist at the New School for Social Research in New York, said this ignores the most important thing retirees should do to preserve their money: adjust the withdrawals every year, depending on how their investments have performed.

“If you encounter icebergs (bear markets), you should cut your spending” and withdrawals, he said.

Another inherent shortcoming are the assumptions about how risky stocks and bonds are. For example, Webb said these calculators assume bonds are a risky investment. This overstates the probability that the household will outlive their assets, he said, because bonds held to maturity are, in fact, a reasonably safe place for long-term investors to park their money.

In contrast, the Vanguard calculator may understate stock risk – and understates the probability of running out of money, Webb said. Economists believe it will be very difficult for stock returns to repeat the extraordinary performance of the past century.

Despite the caveats, Vanguard’s calculator is very useful – just don’t take it as gospel.

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I’ve just used the calculator and it gave me a lot to think about. As a young person (30 years old) I haven’t really been taking my retirement savings seriously. I need to immediately start saving more, so that I will have a sizeable nest egg by the time I retire.

Dave, glad our blog inspired you to save more! Young adults today are not getting pensions. It’s all about saving, which isn’t easy.

Here’s a blog I wrote about savings tips for young adults: https://bit.ly/2Si1UPH

You’re doing the right thing!

Kim

Hi Kim – Thanks for sharing this information with us. Saving isn’t easy for the average American, and it is made more difficult by providing easy access to the funds. We don’t have pension funds to help us and defined contribution plans are glorified savings accounts. We need to create true retirement vehicles that provide professional management and keep the funds away from the individual until they go to retire.

Curious why probabilities fall with higher equity weights?

I am a Vanguard customer and this is first time I used the calculator. I am retired, 74, and expect to live another 20 years. I am not living off my retirement savings since SS, pension and IRA income annuities are doing the job.

I input RMD for spending from savings with a 40/60 stock/bond mix. According to calculator I will not outlive my savings. Now I am planning to live 30 years.

The results I received were summarized in a confusing graph – (1) The way the percentage probabilities were displayed is confusing, even with the explanation offered; (2) the color key (50%/75%/95%) didn’t match up with the colors in the chart; (3) the optimistic scenarios pushed the upper limit of the chart so high that the part I was interested in, where my balances approach zero, was impossible to see clearly. The 50%/75%/95% results didn’t square with my intuition about high vs. low probability results.

I have worked with Monte Carlo results in different applications including this one, and I think the way Vanguard presents the results is terrible – it’s confusing, and offers no further context to help me figure out the part that’s unclear.

I’m very disappointed, but not surprised, since I’ve always found Vanguard’s approach to analysis for customers to be simplistic and skimpy.

This would be a good tool IF IT WORKED. Broke down after the first illustration and would never run again. What a joke!!!

The calculator is OK except that it does not take into account Social Security or if the individual has a pension and/or an annuity. The calculator is fine for what little it does, but not much else.

It does seem kind of simple but, to be fair to Vanguard, I don’t know that I’ve ever seen a Monte Carlo simulation with spending varying with investment performance.

The comment by Peter Blanchette is spot on. Ignoring pension and annuity income and Social Security makes the calculator useless, but it does have the effect of herding naive folks into stock and bond funds.