Main Page

My Main Philosophy in One Sentence:

Instead of presenting a "forecast" of a client's future financial picture based on your assumptions, Otar Retirement Calculator presents a "aftcast" of client's potential outcomes based on actual market history.

Over the next ten years, over 80 million North Americans are hoping to retire.

We have successfully landed robots on Mars and observed their amazing findings. We have successfully discovered cures for diseases. We have found solutions to numerous problems.

Yet our financial planning community still does not have the tools to answer realistically some of the the most basic questions:

Do I have enough money to retire?
How long will my money last?
When can I retire?
How much do I need to save for my retirement?
Do I need a life annuity?
What is my optimum asset mix?

The answers to these questions are one click away!

No More Guessing!

When we use a standard retirement calculator, we guess average future growth rates and inflation. We plug in these guesses together with some basic personal information into a retirement calculator. We push the "calculate" button and get a projection of our retirement finances.

Did you know that in 80% to 90% of the time, these standard retirement plans will fail?

Take for example, a retiree who has one million dollars in his investment portfolio at the beginning of his retirement. He takes out $60,000 annually, indexed to inflation. Assume his portfolio grows 8% and inflation is 3.5% per year.

In the chart below, the red line shows the outcome from a standard retirement calculator. It shows the portfolio value (the vertical scale) over time (the horizontal scale). At first glance, it appears wonderful; the portfolio seems to last longer than 30 years.

Now, calculate the portfolio value if this person were to start his retirement in any of the one-hundred years during the last century using actual market data and inflation. Assume a conservative asset mix - 60% fixed income and 40% equity. Each black line shows the portfolio value over time for retiring in a particular year since 1900.

Most portfolios expired well before the red line which is the projection of the standard retirement calculator.

No More Gambling!

I am not talking about taking your life savings to a casino in Las Vegas or Monte Carlo. What I am talking about is a mathematical model called Monte Carlo simulation. Some people use this model to forecast their retirement planning. While in theory it is based on probability of events, it does have several pitfalls:

The outcome of a Monte Carlo simulation is based on adding a degree of randomness to an average portfolio growth. You still have to guess an average growth rate for the rest of your life.
Markets are random in the short term, cyclical in the medium term, and trending in the long term. They are neither random, nor average, nor trending in all time frames. They are made up of secular trends that can last as long as 20 years. The randomness of the markets are piggybacked onto these secular trends. Assuming an average growth and adding randomness to it does not provide a good model for the market behavior over the long term.
The randomness in the Monte Carlo simulation is based on an assumed distribution curve of random outcomes. Some models use normal (Gaussian) distribution, some use log-normal distribution. In reality, several factors influence the shape of the distribution curve, such as: time spent in retirement, asset allocation strategy, asset mix, withdrawal rate, management costs, to name a few. Any randomness generated based on the incorrect distribution curve will result in significant variations from the reality of the markets.

When Monte Carlo model is applied to retirement planning, these factors introduce serious flaws.

Click to read my article on flaws of current Monte Carlo Simulators. Click here to download the free MC2 simulator mentioned in the article.

The Solution: Otar Retirement Calculator

I developed this model when I was writing my book "High Expectations and False Dreams - One Hundred Years of Market History Applied to Retirement Planning". My philosophy was very simple: Why guess? Why gamble? Why not use the actual, unadulterated historic market data?

Neither the standard retirement calculator, nor the Monte Carlo simulation can account for the Time Value of Fluctuations. The Otar Retirement Calculator does! The Otar Retirement Calculator is based on actual market data. There are no assumptions of average growth or inflation. It gives you a range of portfolio asset projections that enables you to plan realistically for your retirement. When you enter your personal financial data, the model calculates asset values and cash flow streams as if you retired in each of the years since 1900. The actual historic market data is applied to your specific financial situation. The results are summarized in this chart:

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

The green line shows the asset value of the top decile portfolio since 1900. That means only 10% of portfolios ever achieved or exceeded the asset values indicated by this green line. Do not use this for your retirement planning; it is there just to show you what can happen if you are very lucky.

The red line shows the asset value of the median of all portfolios since 1900. That means 50% of all portfolios had a lower value and 50% had a higher value than this red line. And where it crosses the zero line (meaning no money left in the account), it means that half of the portfolios have already run out of money. Do not use the median for retirement planning because the odds are not on your side.

However, the median line may have one useful application for estate planning: When I am estimating the tax liability or the insurance needs at the time of death, then I use the median. In addition, I use the green and blue lines for best and worst case projections, respectively.

The blue line shows the the asset value of bottom decile portfolio value since 1900. It indicates the portfolio value where 90% of portfolios survived and 10% are depleted. This is the line you need to use for retirement planning. That is because at 90% survival rate, the odds are on your side.

Standard Calculator: The orange line which projects the asset profile as calculated by a standard retirement calculator.

Asset Classes:

The model works with four different asset classes:

Equity,
Nominal Bonds,
Inflation-Indexed Bonds,
Cash.

You can enter any percentage of each asset class (as long as the total is 100%) and see how this affects portfolio longevity.

Note: The trial version comes with a fixed asset mix and cannot be changed by user.

Equity Markets:

Since 1900: DJIA, S&P500, United Kingdom (FTSE-All Shares), Australia (All Ordinaries),

Since 1914: Japan (Nikkei 225)

Since 1919: Canada (SP/TSX)

Asset Allocation Optimizer and Scenario Analysis:

All you have to do is click on the "Optimize" button and seconds later, it is all in front of you.

The scenario analysis gives answers to many "what-if" questions.

Automatic Annuity Stop-Loss Calculator:

The calculator automatically projects the probability of running out of money. Then based on that, it calculates and builds a ladder of single premium immediate annuities (SPIA - straight or variable pay indexed to market) that provide life-long income.

You can choose to maximize income security or estate value.

If the results indicate a premature depletion of your investment portfolio, using SPIA will increase your income security significantly.

Investment Portfolio only = No Income Security + No Certainty of Estate

Annuity and Investment Portfolio = Lifelong Income Security + Estate Value

If you have insufficient savings in your investment portfolio to provide you with a lifetime income and the stop-loss calculator is checked, then the Otar Calculator allocates all the money to SPIA. In such situations, even though there is no money left in the portfolio, you will have income for life, albeit less than what you had anticipated.

Insufficient Savings = Reduced Lifelong Income + No Estate Value

Just click on the button and in seconds, you'll get your answer. If you want a three-year annuity ladder then click on the button #3, for a 6-year annuity ladder, click on button #6 and so on.

Manual Annuity Calculator:

You can specify purchasing SPIA manually using one of the following:

single premium amount
monthly payout amount or
percentage of your portfolio assets.

You don't have to choose one of these three options for life: You can say "Buy me a SPIA for $100,000 at age 66, buy me another SPIA that pays $800/month at age 67, then at age 68, buy me another SPIA with 30% of my assets."

You can choose the life annuity with full, partial or no CPI indexation as well as fixed percentage indexation. You can also purchase variable (market linked) SPIA with various Assumed Investment Return (AIR) values. These annuity features are included with each of the modules.

If the chart indicates a premature depletion of the investment portfolio, then I click on one of the buttons #1 through #6 and the program calculates the stop-loss annuity ladder. This is the "suggested" annuity ladder. Then, I just type over my rounded-off numbers until I see a graph like this:

Variable Annuities:

Starting with the 2007 edition, you can enter variable annuities and see what would have happened historically.

Rebalancing:

My research shows that in many cases you are better off rebalancing your asset mix every four years on the U.S. Presidential election year rather than annually.

In the Otar Retirement Calculator, you have a choice of rebalancing annually or on the Presidential election year. You can also specify a threshold: "rebalance only if the equity percentage deviates from the stated asset mix by more than X %". You can also ask the model to rebalance one way only from equity to fixed income.

Reducing Cash Flow in Bad Years:

You can reduce your cash withdrawals if portfolio growth is less than a certain amount or if the withdrawal rate exceeds a specified percent of portfolio assets. The Otar Calculator will then calculate the outcome accordingly and show you what would have happened in all years since 1900.

Limiting Cash Flow to a Percentage of Portfolio Growth or Portfolio Value:

You can limit your cash withdrawals to a percentage of portfolio value or its performance. For example, you might say "I would like to have $50,000 / year income or 80% of the portfolio growth in any year, whichever is less". Or you might say "I would like to have $50,000 / year income or 10% of the portfolio value, whichever is less". The Otar Calculator will then calculate the outcome accordingly and show you what would have happened in all years since 1900.

What you need to run the program?

The Otar Retirement Calculator is built on Microsoft Excel spreadsheet. You need Excel 2000 (or better) and plenty of system resources to run it.