I know of Scott Burns from his financial commentary on the Web and he also created the couch potato portfolio for investing which has gained popularity.

I did know much about Mr Kotlikoff though. He is an economist who has used his economic knowledge and skill to co-developed a software program called E$planner. It is built around a system called “consumption smoothing” which I find very interesting.

It’s the “when you retire” that got me interested at first. I was a little put off by the title initially because I thought it was irresponsible, but after I read the first couple of chapters I realised that the theory of “consumption smoothing” was worth learning more about.

Mr Kotlikoff debunks the idea of limiting your spending in retirement to 4% of your retirement nest egg. This got my attention because it concerned me that I had to but static limits on what I planned to do in retirement. There are too many things that can occur in live that may mean spending more or less at different times.

The main premise behind the theory of consumption smoothing is to balance our living standard throughout our lives such that we neither hoard nor overspend. It is an acknowledgement that at times we will have to spend and at other times we will not spend as much. This makes sense to me so far.

It is an holistic approach to our finances and may bring real benefits to us in our retirement. Take a look at the ESPlanner Presentation and see what you think. ESPlanner takes into account:

“All household economic resources, housing expenses and plans, retirement accounts, special expenditures, taxes, Social Security benefits, real estate holdings, Medicare premiums, and a host of other key factors.”

He talks about consumption disruption which is when we fail to target the right amount to spend at any one time in our lives.

ESPlanner tells you…

• how much to spend, save, and hold in life insurance each year.
• how retiring early, switching jobs, building retirement accounts, moving states, downsizing, refinancing, having kids, paying tuition, … will affect your living standard.
• how investing affects the variability of your future living standard (requires ESPlannerPlus.)

Mr. Kotlikoff maintains that done correctly consumption smoothing is really financial planning done correctly and can lead to a higher standard of living throughout your life.

There are four versions of the standard program. The version for the individual is only $149.00. This is recommended for most people. The Plus Version is $199.00 and includes some Monte Carlo simulation software which allows you to test on how a households living standard can vary with current and planned future investment strategies.

While the software is written around the US financial, tax and social security system, the ideas are universal and could be applied anywhere. If nothing else if will give you yet another perspective on your retirement planning.

Before purchasing the software take the time to go through the presentations and the documents on the website. Understanding what consumption smoothing is all about and how to apply it could to my mind certainly raise your standard of living and probably reduce your fears of outliving your retirement nest egg.

So I ask Mick if I could put his complete email on my retirecalc blog. Luckily he said yes so here it is….

One of the things I have twigged to in my ‘hunt-n-pecking’ has been the simplistic results of online retirement calculators. This is true of both Oz and international calcs ’sponsored’ or provided by financial companies/super funds. Invariably these tend to get ‘you’ to decide/guess on future earnings rates (yeah right!), future inflation rates (yeah right!) and give out ‘average’ and ‘expected’ returns over a 30+ year period. I’d put these things in the ‘Grimm’s Fairy-tales’ - ‘another Walt Disney production’ category

I know you have mentioned this in several posts but I thought I’d send you my favourite links regarding free retirement calculators in case you might want to focus on this aspect, they have an international applicability.

Retirement Calculators from Hell -This is a compilation of links on the early-retirement.org forum (I suspect you may be aware of this site) that points to a series of articles by William J. Bernstein on why the ’standard’ calculators are downright dangerous.

David Bates says: Anything William Bernstein writes is a “must read”. These articles are no exception.

FIRECalc - an all-round Monte-Carlo calculator that will take a range of quite specific user inputs and calculate success-probability based upon actual US stock-market data dating back to the late 1890’s. (Best-of-breed in my view)

David Bates says: FIREcalc site tells us they use historical data and doesn’t try to forecast the future. They developed the idea from the work of John Greaney at Retire Early Home Page. I would definitely use FIRECalc but would compare the results to Jim Otar’s Retirement Optimizer. I always want to compare results from reality based calculators ;0)

Sensible Pension Withdrawal - a very well written humorously slanted tutorial (for the inquisitive but ‘mathematically-challenged’ person) on Monte-Carlo retirement calculation, using variable standard deviations, etc. Kinda ugly but if you work through it it makes sense

David Bates says: I tried to get to grips with what this site is telling me but there was a lot to take in, so I cannot comment. But very interesting and well worth a look.

EasyAllocator - on the face of it this calculator is a tad ‘raw’, but it’s background workings are quite sophisticated. Requires login but does not involve subscription costs, regular email correspondence or ‘nagging’.

David Bates says: It appears to be an Asset Allocator that then lets you chose from a list of Mutual Funds and you can then do some “What if” Calculations. I’d be using the book “If It Doesn’t Go Up Don’t Buy It” by Al Thomas from his web site Mutual Fund Magic with this Calculator I think as I’d be doing my own investing.

Flexible Retirement Calculator - Another free Monte-Carlo calculator that allows a range of inputs (mainly for US-centric info but can be used by others by ignoring various input fields).

David Bates says: It looks interesting but I’m always concerned about making assumptions which this calculator uses. I’d test it against Jim Otar’s before planning my retirement with it.

It would be great if these sorts of calculators existed for Aussie’s, using our tax/Centrelink/etc info, but so far I’m not aware of any.

Of course the real key to using many of these calculators is having a very good understanding of your likely expenses in retirement, both ‘basic survival’ and anticipated discretionary (travel, entertainment, hobbies, etc.).

Cheers - Mick

I’d like to thank Mick for his great email and for allowing me to use it as a post. Finding information we can actually rely on and use to protect our nest egg is time consuming and hard. So I do appreciate being able to use other people’s hard work on my blogs.

If anyone else wants to be a guest blogger and has content that fits with my objectives of preparing Baby Boomers to protect their nest egg in retirement then please email me through my blog or my RSS fed emails. We need to build a global army of like -minded people to offset the marketing forces of the financial institutions who need our nest eggs to pay for their lifestyles.

Retirement Income Calculators take a different approach to the Otar Retirement Calculator. They look purely at estimated monthly income and assume you will need a percentage of your pre-retirement income to live on.

Things I like about it

• Results are shown graphically as you change the slide bars.
• The results are shown in today’s dollars adjusted for inflation.
• It give you a good feel for how your personal contributions, Social Security and any Pension Benefits all add up to a monthly income.
• It is very easy to try different “What If’s” to see different results.
• They explain the assumptions that they are making for the calculation.
• They work it in today’s dollars so you can relate to it.
• They give a disclaimer advising you that their calculator is not to be taken as investment advice.
• It uses the 4% Rule which is a good rule of thumb for withdrawal rates.
• It graphically shows how increasing your savings can have a dramatic affect on the Monthly Retirement Income.

Things I don’t like about it

• They assume an average inflation rate of 3% for the calculations even if you are 30 years old and have 32 years to retirement at 62.
• This inflation rate is also assumed for the pension component.
• It assumes Long Term Average returns for different types of investors.
• It assumes you will need 85% of your pre-retirement income to live on in retirement.
• It may prompt you to increase your risk from conservative to aggressive to try and get the monthly income figure to meet their estimate of what you will need.

Summary

I think this retirement income calculator is good for you to get a “feel” for the monthly income you might need and have in retirement. It is also good for you to see how the amount you save can dramatically affect your monthly retirement income.

It is based on average inflation, average returns and 85% of your pre-retirement income in retirement. They do have a disclaimer though. But please note the use of averages and do not rely on calculators like these to plan your retirement.

When you go to see most financial planners they will use what is almost an industry-wide de facto standard of of long-term averages. They are 3% inflation, 6% fixed income returns and 9% equity returns.

Using these figures your retirement will be rose and you can dance down the yellow brick road with Dorothy and the Tin Man if you like.

But Jim Otar whose background is engineering totally disagrees with this philosophy and has created his own calculator. I think it was Jim who said why do we design an oil rig to withstand a Hurricane and don’t build a retirement plan to withstand a Bear Market crash? So he went out to try to do just that.

What is so special about this calculator is it doesn’t use those voodoo mathematics like long term averages?

It is based on real world results and so uses real world returns to work out your retirement. There is no guess-work involved.

After entering your personal information Jim’s Retirement Calculator goes to work and uses actual historical data going back to 1900 to work out how your nest egg would have survived beginning in each of those years. He calls this his “aftcast”. It does NOT try to forecast the future.

The table indicates the probability of portfolio depletion, as well as the outcome:

Diagram courtesy of Otar Retirement Solutions

The model works with four different asset classes, Equity, Nominal Bonds, Inflation-Indexed Bonds and Cash.

It uses equity market data from USA, UK, Australia, Japan and Canada.

What is really clever though is the calculator works out if you are likely to run out of money and then if this is likely yo happen if actually builds a ladder of immediate annuities to provide that life-time income all us Baby Boomers seek. Please don’t discount annuities until you have seen how they are used. all investments have a place in a portfolio at different stages and dependent on the health of that portfolio. Nothing should be rejected out of hand.

Now you may be wondering how to get this calculator. By the way I am not getting any compensation for reviewing and recommending this program.

You can get the FREE Trial version of Otar Retirement Calculator here. Use it and take the results to your next meeting with your financial planner. That will be fun ;0)

Or get the Otar Retirement Calculator - Full 2008 Edition here for only $59.99. The differences are you get extra screens and analysis pages and you can vary the asset allocation amount which you cannot do in the Light Version.

Allow yourself at least an hour on the site to read what he writes about. Also read his articles on the Time Value of Fluctuations. This article might give you an epiphany regarding your the need to protect your nest egg. moment you may be looking for. Also read his piece on Monte Carlo simulations.

I want to check out the calculator a little more and get some other opinions but I will most likely use it as the benchmark for all other reviews of retirement calculators on this blog. I believe it is that good.

Enjoy and please leave your comments by clicking on the comment link on the top right hand side of this post. Or click on one or more of the social bookmarking icons below. Thank you.

Some of the calculators take a responsible approach and point out their limitations. But many others are merely used to attract site visitors and have no real value.

All calculators should be thoroughly researched before using the results to plan your retirement. Failure to do this may well leave too much life at the end of the money!

There is a saying my Margaret Mead that I think is very relevant here;

“I was brought up to believe that the only thing worth doing was to add to the sum of accurate information in the world.” Margaret Mead

It is my aim with this blog to try to live up to the meaning of that quote.

I thought I might start the ball rolling with a small purpose built retirement calculator I creating in Excel to find out how a retirement nest egg might have performed from 2000 to 2007. During this period we had the Dotcom crash with the S&P 500 losing 40% of its value by 2003 and then we had the bull market run up from 2003 to late 2007. I wondered what the result might be on a $1M nest egg for a Baby Boomer retiring on 1st January 2000.

I used actual historical S&P 500 index returns not the long-term market averages used by many in the financial planning industry. I worked on four different scenarios the result of one are shown below:

Here is the chart of all four showing how they performed against the S&P 500 Index:

You can download 30 page report of my findings and the excel spreadsheet I used here; What if You Retired in 2000, or click on the image of the report at the top of this blog.

You can use the spreadsheet yourself and insert your own figures if you wish. It uses real historical data not averages. It is very easy to use to.

You can also find a lot of FREE information on how to protect your nest egg in retirement on my Blog, Protect Your Nest Egg in Retirement

Please take a look and let me know what you think.