There are numerous financial calculators out there but there are only a handful that are user-friendly and do the job right. One of my favourite calculator online is the Vanguard Retirement Nest Egg Calculator.
What is it?
The Vanguard Retirement Nest Egg Calculator is a tool that uses Monte Carlo simulation to generate the probability that your nest egg will survive till your end of life based on your annual spending. For those of you not familiar with Monte Carlo simulation, the simplest explanation is that it is used to model the probability of different outcomes. What the Vanguard calculator does is it uses Monte Carlo simulation to create a large number of potential market scenarios (5000 simulations!), including up and down markets of various lengths, intensities, and combinations.
At the end it determines the probability that your portfolio will last for the entirety of your retirement by tallying the results of each independent simulation. Pretty cool right?!
How’s the user inferface?
I love how simple the tool’s user interface is. There are only six fields that you have to worry about. It has three slider bars where you select the number of years your portfolio you last, i.e. from retirement till death, your portfolio balance today, and your annual spending amount.
The next set of variables you need to tweak is your portfolio mix, i.e. your percentage of stocks, bonds, and cash. Due to the inherit higher return nature of stocks, the higher your percentage in this category, the more likely that your portfolio would survive your retirement years.
Finally, after filling in these six variables, click “Run simulation” to see your result. The following is what the simulation outputs if I kept the default values in the fields. As you can see, there is a 73% probability that the portfolio could survive 30 years based on the default settings. If I were to adjust my asset mix to include 80% stocks and 20% bonds, this figure shoots up to 85%. Conversely, if I increase my annual spending to $65,000 a year, the percentage falls to an abysmal 5%!
A simple tool that does the job
The Vanguard Retirement Nest Egg Calculator is an excellent tool for a quick and dirty projection of the survivability of your portfolio. The Fire Fellow filled his own figures and still has some work to do on his path to financial independence.
As usual, if you have any questions, Ask the Fellow!