Blessed by the Potato

Most of what I write is aimed at younger folk: people my age, and also people who are likely to stumble upon and read blogs in the first place. So I talk a fair bit about investing and saving for retirement, but not much about what to do when that switch to living off your accumulated capital starts looming close.

Recently, someone outside my typical audience asked me that deceptively simple question: can I retire?

There are a fair number of calculations and factors that go into that decision. At the most basic level it all comes down to finding ways to meet your spending needs until you don’t have spending needs any more (i.e.: you die). How much will you spend, how much do you have? What will your rate of return be, and how long might you live?

People have come up with some quick rules-of-thumb which I think are a little chancy: I’m all for approximations, especially when it comes to long-range forecasting where precision is impossible, but setting some percentage withdrawal rate seems just a little too simple. So I decided to tackle the problem from something like a first principles approach: what would the finances look like after the first year of retirement — where would the money go out, where would it grow? And for the year after that? And so on.

I made a fairly simple spreadsheet that will just take some assumptions on returns, and run through the scenario of drawing down the savings while at the same time earning returns on the investments.

You can download the spreadsheet — Potato’s Retirement Calculator — right here.

It’s not the most complex retirement calculator: there are some software packages out there that include a tax package to estimate your tax liability to the dollar, and that run massive Monte Carlo simulations on a whole gamut of market return scenarios. But given how uncertain the future is, I think this should serve many of you well enough — and since it’s spreadsheet-based, it’s easy to see the calculations, fix any bugs that might be there, or customize it for your own use.

Just enter your assumptions about rates of return, inflation, pension income, CPP/OAS, and investments, and then the spreadsheet will tell you approximately how old you’ll be be when the money runs out.

There are some quirks: for one, I didn’t set it up to solve the inverse problem (given spending and life expectancy, calculate the investment nest egg needed). For another, I originally set it up for an age 60 or 65 comparison, and CPP/OAS, and pension really only fit into those ages or later. It’s not hard to change for your own case, but it’s not as automatic as the other variables.

Download it, give it a try, and let me know what you think. Also be sure to check out the next two posts for more details.

Part 2: details on variables and calculations.

Part 3: running through scenarios.