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Hoadley Retirement Planner
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| Overview |
The Hoadley Retirement Planner uses Monte Carlo simulation to examine the range of possible outcomes of a savings and investment strategy and the likelihood of being able to achieve standard of living goals during retirement.
The key to effective retirement planning is to avoid focussing solely on expected returns. Instead, the risks of a given strategy should be explicitly modelled to highlight the probability of being unable to meet planned expenditures during retirement. If the risk is unacceptably high then changes should be made to the plan -- such as altering the investment portfolio's asset allocation mix to reduce volatility -- to improve the odds of success.
The Hoadley Retirement Planner lets you model both the risks and returns of a long term savings and investment plan taking into account planned expenditure during retirement. Because the Monte Carlo simulation is very fast (around two seconds for 10,000 iterations),"What if" scenarios can easily be prepared to see the impact of varying key inputs such as inflation, expected return, volatility, and spending during retirement.
Unlike most retirement
planning software applications which simply calculate an expected median balance
for each year of the plan as if these returns are a sure thing, the Hoadley
Retirement Planner lets you drill down by year to reveal the expected
distribution of the balances. Highlighting the range and probability of outcomes
should be a key objective of any retirement plan.
| Inputs |
To use the retirement planner you first define one or more investment accounts and specify their initial balances. Usually at least three accounts would be defined, covering taxable, tax deferred and tax free investments. But these categories are not fixed and other types of accounts can be set up by configuring the way investments and withdrawals from accounts are to be taxed.
Other inputs, all of which can vary over time, include annual contributions to investment accounts, expected average investment returns and volatilities, other income, such as pensions and annuities expected during retirement, and anticipated expenditure levels during retirement. Dollar inputs, such as annual savings or retirement spending, can be optionally indexed for inflation.
Strategic asset allocation, which determines the overall portfolio return and volatility, is the most important part of any retirement plan. To help the user with this process the Retirement Planner includes a "Performance Estimation" worksheet. The worksheet provides a simple way of examining various asset allocation strategies from conservative to aggressive. The overall portfolio return and volatility is calculated for each asset allocation strategy and compared with the most "efficient" combinations of assets from an efficient frontier constructed from the same inputs.
There is no silver bullet
for arriving at an appropriate strategic asset allocation. But the performance
estimation worksheet can be a valuable aid in understanding the implications of
asset allocation decisions on portfolio returns and volatilities, and in
selecting an efficient mix of asset classes -- the highest return per unit of
risk -- commensurate with the investor's risk tolerance.
| Retirement Planner Outputs |
The Median portfolio balances chart shows the balance of each investment account over the life of the plan. All outputs are adjusted for inflation and shown in today's dollars.
To reveal the uncertainty (risk) associated with the plan, each bar on the chart, which represents the balances for each account as at a specific age, can be expanded to show the probability distribution of these balances. The account balance distribution chart (example below) is the key to understanding the risks (both downside and upside) of the plan.
The example below is a cross section of the same retirement plan shown above for the bar representing the median balance at age 64. It clearly highlights the wide range of possible outcomes (from $373,000 to above $1,998,000 in the example below) at age 64. The higher the volatility of the portfolio, the lower the median balance and the wider the range of outcomes.
The distribution chart can also be shown as a cumulative probability chart. This lets you see at a glance the proportion of balances expected to be below a specific value. For instance the chart below, which is the cumulative version of the chart above, shows that at age 64 there is a 20% chance of the total of fund balances being below $715,000.
The probability of the plan failing is also calculated by the planner. This represents the likelihood of being unable to fund all expected expenditure during retirement.
Finally a summary for each
year of the plan can be displayed showing cash in and out and the total portfolio
balance at the end of each year of the plan. Yearly portfolio balances are
split into three percentile groups: 10th percentile (10% of balances will be
equal to or lower than the 10th percentile); median (ie 50th percentile); and
90th percentile (10% of balances will be greater than the 90th percentile).
| Software Environment |
The Hoadley Retirement Planner Simulator will run on versions of Microsoft Excel 2002 and above (32-bit) on Microsoft Widows 2000 or above.
The Hoadley Finance Add-in for Excel version 10.1p or
later must be installed before using the Simulator.
| Download the Hoadley Retirement Planner |
The Hoadley retirement planning software is free but requires the full version of the Hoadley Finance Add-in for Excel.