With savings and retirement calculators you plug in a few numbers and a number will be spit out.
And that number is often a very exact number. Not even rounded up to a multiple of 5 or 10.
Which is fine if you are saving and investing in assets in which you are guaranteed a fixed return.
But most of us invest in assets that don’t guarantee fixed returns. In fact, one of the best performing assets in shares, offers no such guarantee. Not even close. Some years we experience large drawdowns and other years massive increases. The short term is very unpredictable.
The problem with that is even if returns average a particular number, the returns we receive can be quite different indeed. A lot depends on the order of the returns. For example, if you experience some large drawdowns towards the end of your investing timeframe when your account balance is the largest it will ever be, you will receive much less money than someone who experienced large drawdowns earlier on in their investing.
If I punch in some numbers into my financial model, the range of outcomes is almost unbelievable.
For example, we will assume you are 40 years old and have $200,000 to invest. You invest $10,000 a year thereafter for 24 years until age 65. We will assume you invest 75% in shares and 25% in cash. We will assume 4% after inflation returns from the shares and 0% after inflation from the cash. Inflation of 3%. For the shares we will assume fees of 0.4% and finally we will assume a standard deviation of 20% on the shares.
We will run the above under 1000 scenarios using the investment return numbers above in 1000 random orders.
Mean result $859,000
Median result $735,000
Best result $3.2 million
Worst result $215,000
Worst 5% of cases less than $350,000.
Anywhere between $215,000 and $3,200,000 is a massive range. Same 4% annual returns in all cases, just a different order in which the returns were received!
Yet if I plug the same numbers into a retirement, savings or compound interest calculator it will matter of factly say, you will have $782,347.
Pretty close to the median result spat out with my modelling. However, no accounting for all the other scenarios that may occur.
At age 65 you will have $782,347.
Life doesn’t work on the medians though.
What if you were one of the unluckiest 5% in terms of your timing? You can’t help when you were born or when you started investing, but just by being in the bottom 5% in regards to timing, you may only end up with between $215,000 and $350,000 at age 65.
Less than half of what you were told by the other retirement calculator.
There are many retirement calculators out there. Just be careful with putting too much reliance on what they are telling you.
They can be a good tool and a useful starting point, but I have found most don’t account for the variations of outcomes. Especially if you are invested in assets that don’t provide guaranteed fixed rates of returns.
I would hate for someone to plan on having a particular ‘number’ at retirement, only to end up with much less in their account.
Life is as random as the numbers provided here. Not as reliable as the numbers provided elsewhere. Besides, average numbers are often the result of many not very average (positive and negative) results.
Don’t rely on averages. Try and front load as much as possible, so that poor returns later on don’t have as big of an impact. It is highly dangerous to rely on compound growth just when you need it the most (the last years of saving). You can take the impact of unlucky timing by saving more than you need earlier.
In saying all of the above, I have added several retirement calculators to the calculator page recently.
Despite the limitations, they can still be a useful resource if used correctly.
I decided to add some to the website as a lot of the ones out there are too basic. They don’t allow for variable incomes, variable returns, or variable outcomes. I try to allow for some of these variables.
Here you can find:
KiwiSaver calculator. This will tell you your KiwiSaver balance at retirement, age 65, and at first drawdown.
Retirement caluclator with KiwiSaver. This one will tell you how much you will have at retirement from both your KiwiSaver and non KiwiSaver investments. Very comprehensive calculator that allows for one off contributions and withdrawals, as well as regular contributions. Also allows for variable investment return assumptions and variable savings rates.
Retirement calculator without KiwiSaver. In case you want to know your non KiwiSaver investment balance at retirement only.
Monte carlo withdrawal calculator. This one will give you the results of 1000 random variables for how much you may need for retirement and what the chances of that money lasting are.
The first three calculators telling you how much you MAY have at retirement, and the last one helping you see how much may be enough in retirement.
Again, these are just resources. It is not personalised advice, nor is it a guarantee that these numbers will play out. It is to help you decide your course of action and any changes you may like to make. But, I think you will find these are the most comprehensive retirement calculators tailored for kiwis that you will find. And being Excel sheets you know exactly what inputs are going into the calculator.
If you need help with your personal retirement planning, then get in touch today.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here