The 2010 Edition of the Otar Retirement Calculator is now available!  

 

It is a non-Gaussian retirement calculator based on actual market history since 1900. No assumed average growth rates, no assumed average inflation, no Monte Carlo simulators or other "man-made" artificial economic scenario generators.

The 2010 edition includes new features for other risk factors such as calculation of emergency funds, as well needs analysis for life, disability and long term care in conjunction with your retirement plan.

Download the Trial Version

Order the Calculator

 

 

My book, "Unveiling the Retirement Myth" is ready to ship.

 

It has 525 pages of jam-packed information about retirement income planning based on

non-Gaussian philosophy, including numerous worked examples.

Order now!

 

Click here to download a sample chapter. 

Find out why any amount of loss might become a permanent loss in a distribution portfolio,

why efficient frontier, asset allocation, frequent rebalancing, asset dedication, diversification, the concept of "long-term", Monte Carlo

don't and can't work in a distribution portfolio as you might want to believe.

 

Learn the concept of the "Zone Strategy" that will enable you to have lifelong income regardless of how much asset you have (well, within reason of course).

Find out why the luck factor is the most important determinant of a distribution portfolio's success and how come the investor makes money only in 2.5% of the time, only during non-Gaussian market events.

Bulk pricing is available

 

Financial Post links: Video 1, Video 2, Article, Article

Discussion forums: Bogleheads

 

Testimonials:

Jim: Thank you for forwarding your book.  I downloaded it early this morning and just now, after several hours, completed the first read.  I'll sum it up in one word "SUPERB"!!!
In my opinion, Jim, your book should be mandatory reading for every financial advisor - regardless of the area of their present or future professional focus.
Well done, and thank you!!! ...and you may quote me on the above. Ami Maislish, President, Life Guide

Jim: Your book is awesome! Very well written and crisply organized. It's a great encapsulation of your ideas and concepts. I can't wait for the hardcopy version. Thank you for the huge effort! Brant O. Greene, CFP®, CRPC®, MBA, Ameriprise Financial

Jim: Thank you for early access to your work. You have successfully derailed my entire day's schedule as I've been power-reading through the pdf document. I confess, I did begin to get depressed and skipped to the zone chapters to see what hope you offer.  

First and foremost, thank you for the research, clear communication and prolific illustrations. Too many papers and reference books fail to break out the exact thought processes and calculations behind the text. Your illustrations are uniformly easy to read and support each contention. Thank you.

Second, your consideration of a wide range of strategies and mixed tools demonstrates that you are a planner yourself. You did not take the simple way out, merely critiquing stocks, bonds and mutual funds. Including analysis of various annuity structures and consideration of life and long term care insurance bring the document from the realm of the academic to the pragmatic. Very helpful. Kevin J. Reperowitz, CFP®, SAGE Financial Group, LLC.

Jim has applied his exceptional analytical skills to create a ground-breaking contribution to pre- and post-retirement financial planning - a must read for all serious students of the subject. Gail Bebee, personal finance speaker and author of No Hype  - The Straight Goods on Investing Your Money.

Jim: I perused your book and it is wonderful. Adele Gipson, CFA, CFP, CPA, Consolidated Planning Corporation.

Jim: It is interesting to see what I consider "real" planning for retirement. There is so much hype about the right amount of money to have, so much about diversified investments, etc. that I am pleased to see a realistic and pragmatic approach. I especially liked the story about the financial advisor the client a muffin and coffee, determining that he had $1 million saved and needed $100,000 per year to live on.... and the advisor basically said "I can't help you" rather than trying to get a "retirement plan" for the fellow. That is the best story. Toni Chasmar.

Jim: I absolutely loved your newest book and would like to employ this rational and the Zone strategy with all my clients. Graham Cook, CFP, CIM, FMA, RDA, Composite Finance Inc.

Jim: I have been reading at your website for some years now and you are my hero for telling it how it really is, unlike the rest of the financial "industry". Sharon Rowan

 

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 most basic questions:

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:

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. Some of the most sophisticated (and very expensive) MC simulators may simulate the volatility of returns better than others. However, what kills a retirement portfolio is not the VOLATILITY of returns, but it is the SEQUENCE  of returns. Click here to download the free MC2 simulator mentioned in the article which does a better job in simulating both volatility and sequence of returns. But:.

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 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 lucky.

The blue 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 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  red line shows 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. If this line does not touch the zero line until your age of death, then you have an good retirement plan 

  

Asset Classes:

The model works with four different asset classes: 

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.  You don't have to drop names of Nobel Prize winners and explain mysterious concepts like "efficient frontier". This optimization process will tell you exactly what the optimum equity/fixed income asset mix should be based on actual market history and client's own cash flow picture: Lowest probability of depletion, longest portfolio life, largest residual amount of money in the portfolio. All by one click!

 

 

 

Automatic Annuity 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

 

 

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 no ladder (one single SPIA), click on button #1 and so on. 

 

Manual Annuity Calculator:

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

  1. single premium amount

  2. monthly payout amount or 

  3. 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: 

You can enter variable annuities and see what would have happened historically. Do they provide you lifelong income? What about the inflation effect? All there.

 

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 2002 or better to run it. Also, you must allow macros to run because the software uses plenty of macros.