Software for retirement planning

[Setforlife]

An engineering friend of mine told me of a principle in engineering "You cannot add a more precise number to a less precise number." and I see accountants and financial planners doing that all the time.

Your earnings over the next 20 years, the rate of return on your investments, your health, are all less precise numbers.

Coming from the engineering background, I don’t believe this is the approach that would be used in this case. We can and do use historical numbers all the time to estimate future requirements, eg 100 year storm wind figures to estimate shearing forces plus a large margin based on other factors. The large margin is where engineering (structural/civil) at least diverges from financial planning, as engineering worries about guarantee and say 99.99% will be ok, which isn’t probably reasonable in most financial plans. There is a long long way from 99% success to 99.99%

Certainly not having perfect data or figures to work on would never prevent you trying to model the outcomes. Possibly engineering types are more likely to want to model as much as possible but I’ve certainly never heard anyone in engineering say there is no point as sure what could you do differently anyway. You model potential outcomes and you follow the process you’ve decided mitigating for the edge cases with risk based planning.

In these examples you generally wouldn’t do anything differently now, but you would have a plan developed for various scenarios to mitigate risk.

 

[conor_mc]

This is the key point. A 59 year old might get some value out of it but a 46 year old will get very little guidance on decisions to make today.

Since I’ve just done this exercise in the past year, I can unequivocally state that it has informed certain other financial decisions. I can, but don’t have to, max out AVC’s every year to meet my financial goals. Knowing that means I can consider trip-of-a-lifetime family holidays, private schooling for my kids, etc.

 

[Brendan Burgess]

Knowing that means I can consider trip-of-a-lifetime family holidays, private schooling for my kids, etc.

Which is what I said in my first post

All you could get in broad terms is
1) You have loads of money so don't worry.
2) It will be about ok, so don't go too mad now and if you retire early you might get into real difficulty later.
3) It's going to be very tight to stop going on holidays and make your car last as long as possible.

 

[conor_mc]

When you’re considering either/or decisions like a multi-year commitment to private school fees, for three kids potentially, and your earnings as a couple are asymmetric, it’s really not as hand-wavey as that.

It might be a first-world problem and we’re lucky to be in a position to consider it, but that doesn’t mean it’s a trivial decision. These things can stack up over secondary/third level and potentially leave your pension pots short.

 

[Brendan Burgess]

It is actually.

The options are
1) I can comfortably afford to pay private school fees for three children
2) No way, can I afford to pay private school fees for three children
or
3) The future is uncertain and the longer term future is even more uncertain. Do I max my AVCs or pay for private school for my three children? Assuming 3% returns instead of 2% returns on investments would make a big difference, but you have no way of knowing in advance what the return will be.

 

[Brendan Burgess]

I would approach the question as follows.
Three kids by 6 years by €10,000 = €180,000 over the next ten years.

We have a €750k house and a €100k mortgage and €400k in our pension funds.
If we send them to the Christian Brothers we can put the €180k into our pension funds or clear the mortgage early or retire a year or two early.

Which choice do we make, given the uncertainty?

It's not an easy choice, but I really doubt that inputting the figures into Excel will help that much.

 

[BIG-notorious]

Let's suppose you are 59 and considering retiring. Your returns have been 9%p.a., but you consider the average/median return to be 7%. What action do you take regarding this extra 2%?

None. I look at the profile and act according to that (within drawdown limits and my own spending plans)

But as time goes by I'll start spending the actual rather than profile fund. Because the years left for it to revert to mean will have reduced, and actual performance will shift the mean as well.

 

[Fortune]

An engineering friend of mine told me of a principle in engineering "You cannot add a more precise number to a less precise number." and I see accountants and financial planners doing that all the time.

In order for an engineer to be told to make something, an accountant and/or an actuary will have been involved in the decision to proceed by using "less precise" numbers.

 

[Fortune]

I really doubt that inputting the figures into Excel will help that much

It would at least give the numbers you used to get there. It can then further examine those numbers by figuring out what effect some of those actions will have.

1. Kids have a (possibly) better education
2. An increase in retirement income of €x~y per annum
3. A saving of €z in interest over the original remaining mortgage term.

It is a useful exercise to help envisage the potential effects of your decisions. There might be a lot more hand waving estimations than when you know the tensile strengths of concrete versus steel, but it's better than making a financial decision based on the positive vibes you may get from the notion of being debt free.

 

[conor_mc]

It's not an easy choice, but I really doubt that inputting the figures into Excel will help that much.

Doubt if you will, but it is literally helping me right now.

 

[jpmackey]

I’d also push back a bit, Brendan, you can’t throw the baby out with the bath water.

Making a detailed excel financial plan has taught me a huge amount about personal finance; pensions, AVCs, taxes etc. and I have still a lot to learn.

It has been life changing; I have shifted from someone that was expecting to work 9-5 until I am 66 to someone that will possibly be financially independent at about 50. My model has been critical to identifying that as a goal.

 

[Brendan Burgess]

it is literally helping me right now.

So what decisions have you made as a result that you would not have made had you not access to this software?

 

[BIG-notorious]

So what decisions have you made as a result that you would not have made had you not access to this software?

Having my own model on AVCs, expected returns, and drawdown in retirement along with a net pay calculator (which includes my specific circumstances eg pension contributions and VHI) helps me develop and implement a plan to reach my targets.

My absolute goal is to retire at 60. My wish is to retire at 55. I've identified my comfortable retirement income.

My model showed that a retirement age of 55 is unlikely, barring an even less likely stroke of financial luck. It shows also that the more I contribute the more likely i am to hit my target. No surprise there, but it definitely motivates me to push more into my AVCs to have the numbers in front of me. That's decision 1, implemented.

It also shows me that the last 5 years of Maxing AVCs make not much difference- there's not enough time for compounding. But i can take more unpaid leave, basically enter semi-retirement at 55 rather than continue to pay into my pension fund. Decision 2, planned.

Separately, although it's an extension really, my expense budget helped me identify my comfortable income in retirement. That's decision zero maybe, which was a key factor in decision 1 & 2.

• My budget also shows (to nobody's surprise) that my mortgage is my second biggest monthly obligation after my AVC. While overpaying my 2.35% fixed interest €55k mortgage is heresy on this site, having neither AVCs nor mortgage going out of my wages will allow me to comfortably work only 40 weeks of the year at 55.

Then there's the analyses of my investment options, median returns standard deviations etc which helped me choose my vehicle (decision Zero-Alpha? My numbering system has already gone to hell) and map out the likelihood of reaching my target given input & desired output.

The point is that my path to retirement is significantly more than picking a random fund and shoving as much money into it as i can afford.

I'd suggest that if you're just maxing out your pension without a clear plan of what you want, when you want it, and how you're going to get it then you're basically just throwing your money in a hole and hoping it meets other money and makes babies.

Doesn't seem like a great strategy to me.

 

[Brendan Burgess]

I'd suggest that if you're just maxing out your pension without a clear plan of what you want, when you want it, and how you're going to get it then you're basically just throwing your money in a hole

Let's start with this big statement as it's the easiest to debunk.

Putting money into a pension scheme is never throwing your money in a hole.

If a 40 year old is happy in their job and doesn't know if they are going to get married and have children and doesn't know if they will want to retire early, it doesn't really matter. By putting money into their pension fund, they are increasing their wealth and flexibility, even if they have no idea where they will be in 10 years.

 

[Brendan Burgess]

It shows also that the more I contribute the more likely i am to hit my target.

That is not a decision affected by the model. You know that anyway.

You seem determined to retire early - great. Then max your pension contributions now.

You won't know if you can retire at 50 or 60 or 70 until you reach that age and know how much you have.

 

[Brendan Burgess]

It also shows me that the last 5 years of Maxing AVCs make not much difference- there's not enough time for compounding.

Again that is not a decision now.

At 45 when you are considering retiring at 50, it might make a decision.

Ask the question when you are 5 years from retiring telling us that you have realised that maxing AVCs won't make much difference and we can discuss that then.

 

[Brendan Burgess]

having neither AVCs nor mortgage going out of my wages will allow me to comfortably work only 40 weeks of the year at 55.

Again, the model won't affect this decision now.

Should you max your AVCs or pay off your mortgage at 2.35%? That is actually a decision you should make now and it's really not dictated by your Excel spreadsheet to any extent.

 

[Brendan Burgess]

Then there's the analyses of my investment options, median returns standard deviations etc which helped me choose my vehicle (decision Zero-Alpha?

Your vehicle is your pension fund. You don't need an Excel spreadsheet to show you that.

Which fund? 100% equities. Looking at historic median returns and historic standard deviations won't help you.

 

[Brendan Burgess]

Don't get me wrong, it's a perfectly legitimate exercise to speculate about how well off you will be in retirement and to wonder what age you will be.

When you are approaching retirement age and wondering if you can retire early, it will be tough enough to make that decision.

But fantasising about it 10 years before you might retire might be fun, but is pointless.

The unknowns are just too...unknown.

 

[Setforlife]

In order for an engineer to be told to make something, an accountant and/or an actuary will have been involved in the decision to proceed by using "less precise" numbers.

Generally it’s the opposite of this, engineers don’t have much use for accountants or actuaries. Or indeed being ‘told to make things’

It also shows me that the last 5 years of Maxing AVCs make not much difference- there's not enough time for compounding. But i can take more unpaid leave, basically enter semi-retirement at 55 rather than continue to pay into my pension fund. Decision 2, planned.

not enough time for compounding assumes you were not going to leave a large part of funds in an ARF post retirement? If you are planning that then full tax relieved AVCs enjoying tax free compounding ongoing in your ARF would make quite the difference. Not sure how a model could show otherwise?