Free Retirement and Asset Allocation Planner – Tip$ter – Worth a Look

I was asked to take a look at the Tip$ter Retirement and Asset Allocation Planner by the creator Eric Cernyar and at first glance it is impressive.

Sample Tip$ter $1M portfolio for a 60 year old

I am assessing this as a Baby Boomer with a view to what it will do to help me as a Baby Boomer get some confidence in my own retirement planning process based on the value of my own nest egg.

(the chart opposite is not my nest egg. I just used $1M for the test)

Eric’s calculator is very comprehensive. I would need to spend much more than an hour or two playing with it to learn all its idiosyncrasies. It’s better to get it out there so you can try it yourselves.

In the short time I have  “played” with it here’s what I like about it.

  • Eric has an engineering background and has used Monte Carlo simulations extensively in that field. So he understands that Monte Carlo Simulations are not the Holy Grail to financial planning but are a tool to be used to generate possible outcomes.
  • He avoids asking you to guess the inflation rate or nominal rates of return. He says TIPS real return rates have rarely exceeded a 1-3% range. Also real rates of return for TIPS 20 years out are available on many web sites.
  • He talks about “robustness” and “rational justification”, terms I like to hear from financial planners.
  • He uses TIPS as the safe investment reference point to measure against your actual or preferred investment portfolio allocation. Based on the comparison you can tell if you are better off risking your nest egg or a percentage of it, or leaving it all in TIPS.
  • Using the program you can assess how much risk you are prepared to take for the returns you would like from your investments and chart it.
  • It shows how your nest egg would perform being fully invested in TIPS and then overlays your current or chosen investment allocation. This is then tested using the Monte Carlo Simulator and the results charted and compared with the TIPS results.
  • Changes to the calculator inputs are calculated immediately so you very quickly get a “feel” for how those changes will/can affect your retirement income over a given period of time. The more you play the more you get the feel for the calculator and how input changes can affect the outcomes.
  • He does not use “Average Returns” but “Real Annualised Returns” and notes they are always less. A unique feature for Tip$ter’s Monte Carlo simulator is it allows you to enter an expected annualised rate of return, NOT an average return.
  • Tip$ter has been built to make you think in terms of the Expected “Equity Risk Premium“. Basically how much risk do you have to take to get the return you would like. Is the risk worth it vs. investing in TIPS or can reducing your allocation in risky investments make it worth it?
  • Eric brings all this information together in one sophisticated chart he calls the “Dispersion of simulated results for different Asset Allocations“. In simple terms he plots various risk profiles and the Monte Carlo results above and below the median retirement income for your personal profile.
  • The most impressive feature is Tip$ter is a Free Retirement calculator with a built-in Monte Carlo simulator.

Now for some concerns to which I am not qualified to answer but wish to raise anyway.

Let me state I am no expert on these calculators.  Apart from what I have read at web sites like Jim Otar’s on Monte Carlo Simulations am not expert on it either. Read Jim’s article and make up your own mind about its relevance to Eric’s Monte Carlo simulation model. Although I will email Eric and ask him to respond to the Jim Otar article and hopefully publish his response with his permission.

Zvi Bodie is the salesman for investing in TIPS with his book, “Worry Free Investing“. And just to confuse you even further read what William J. Bernstein has to say about all-around good guy Zvi Bodie love affair with TIPS in 2003,

“Currently, they yield a real 1.1%, and although they are tax-deferred, the owner will find herself taxed on both this yield as well as the underlying inflation component at maturity, making a negative real after-tax return nearly a certainty for most investors.”

In my initial reading of the Tip$ter web page I did not see it mention tax implications. But I found this in the Tip$ter User Manual.

“Depending on popular demand and the profitability, if any, of TIP$TERĀ®, a future version may be released that accounts for taxes, allows users to segregate their portfolio into taxable and tax-sheltered accounts, and assumes that the portfolio will be managed, rebalanced, and drawn down in the most tax-efficient manner. But for now, the author felt that TIP$TERĀ® was complex enough.

I like Tip$ter and the neat way it has been put together. It’s all on one page with all the information tightly integrated and then displayed in smart-looking charts for easy analysis of any changes you make to your input data in real-time.

If you know nothing about how your nest egg can pay you an income through 25-30 years of retirement and want to get some “feel” for how the numbers might work out, then spending some time learning to use Tip$ter will be time well spent.

Leave a Reply

CommentLuv badge