Background
There are an increasing number of sleek but simplistic retirement calculators out there, and most of them are basically the same. You put in your savings rate and overall asset allocation, and it crunches some numbers based on historical market returns to see if you can replace 80-100% of your current income in retirement.
Then there’s ESPlanner, which represents “Economic Security Planner”. It is based on consumption smoothing, an economic theory where the primary goal of financial planning is instead to avoid abrupt changes in one's standard of living. Here is one graphical explanation:
This method has gotten some extra publicity because it often tells you that you need to save less money as compared to other calculators. However, since the software cost $149, I never really got to try it out. But now, they have released ESPlannerBasic, which is a slightly stripped-down but free version that everyone can tinker with. For example, it assumes that everyone will live to 100 in its computations.
You input various financial information like income and assets, and the calculator will give you a “spending and saving plan” for each of the rest of your life. I think the most important column is savings:
Saving is the recommended increase (reduction) each year in your regular financial assets. This saving is over and above your specified contributions to retirement accounts.
Sample Run of ESPlannerBasic
Let’s take a look at some of our results, using very rough numbers and a retirement goal at age 50. (Sound familiar?) Our “standard of living” has us spending $60,000 per year as a couple forever. During the next few years, we are supposed to save about $75k per year. (I specified zero future retirement contributions for simplicity, it’s all included in the $75k.)
Then at my chosen retirement age of 50, things change fast, with us starting to take large withdrawals from savings:
That’s be scary! Then, at age 65, the calculator assumes that Social Security will kick in, which almost has us at a zero savings rate.
Criticisms and Compliments
My thoughts on this calculator are pretty much in line with my thoughts on consumption smoothing in general.
For starters, I don’t like the idea of a calculator telling me what I should be spending in retirement. I like the idea of constructing this on my own, based on conscious decision making. However, the fact that the calculator chose $60,000 per year is creepy. Beforehand, I had already estimated my non-housing expenses in retirement at $24,000 per year. My housing costs are current about $36,000 per year. Add them up, and you get.. $60,000! Of course, at that rate the mortgage should be paid off after 29 years. Still, just an interesting coincidence?
In addition, the calculator gives very specific results based on what are essentially wild guesses. I have no idea if my income will stay the same, increase, or decrease. I have no idea if Social Security will change the full retirement age to 75, or if benefits will be means-tested. I have no idea what tax rates will be 30 or 40 years from now. So I’d take the results with a big grain of salt.
However, since the calculator is free, I can play with many different scenarios and see how different inputs change the given results, and this may help in my retirement planning. What are the most sensitive factors? I hope to try exploring this next.
Via Bogleheads and WSJ Wallet.
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