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Articles on Retirement Modeling

Choosing Account or Asset Class Returns

Predicting investment returns into the future is difficult, if not impossible. There are many sources for such predictions, and the underlying data to support them. In addition to the data, your own viewpoints and feelings about the future come into play. Ultimately, choosing returns is a financial planning decision that requires your active involvement. If you aren’t comfortable with making educated guesses for your own situation, then getting paid financial advice may be in order.

For starters, here are a few resources for estimating historical and expected returns:

Frequently Asked Questions – Pro

What are the [low] Asset Classes?

We offer some simple built-in asset classes. But you can define your own (NEW in Asset Classes), then reference them in your Accounts to specify their Asset Allocation. The [low] options on Asset Classes are our attempt to offer the option to model your finances using lower investment returns going forward. Many experts say you should not be using historical returns for stocks in the future, but nobody knows for sure. Asset Classes and their returns can be created and edited by users, and we really recommend that users take responsibility for their own decisions there, else it puts us developers in the role of giving financial advice. There are references above for estimating Asset Class returns.

How do I find the Asset Class returns — Interest, Dividend, Realized, and Unrealized percents — for a typical mutual fund?

First understand that the Interest return % only applies to cash-like investments that pay interest. (Interest and dividends are often taxed differently.)

Now let’s take a typical mutual fund as an example: Vanguard’s Total Stock Market Index Fund Admiral Shares (VTSAX). First, go to that fund’s page at Vanguard.

Click on “Price & Performance” then from that page, click on “See cumulative, yearly, and quarterly historical returns”, which is about halfway down on the right in small letters, to get this page.

Look in the table of Annual investment returns for the most recent year. The number in the column “Income Return” is the Dividend return %. The Capital Return in that table should include both Realized and Unrealized. To get the Realized portion of that, click on “Distributions” to get this page.

Find the “Realized capital gain/loss as a % of NAV”. This is the Realized return %. Subtract that Realized gain/loss from the Capital Return above to get the Unrealized return %.

Note these numbers may not be perfectly consistent, depending on Vanguard’s reporting schedule. Also, if you want the average over many years, you may have to compute or estimate that yourself. For more detail, talk with a Vanguard representative.

How can I debug where my money is coming from or going to?

The Cash account is where any income for a given year will accumulate, unless you direct it elsewhere. The Log report (last report in the Reports section) shows every single transaction for every year in the simulation, so if you have an unknown amount accumulating or disappearing, you can scroll to the year in question in the Log report, then look in the EVENTS section in that year to see exactly where that sum is coming from. Most likely one of your defined events is producing that income or accounting for the withdrawal.

How do I model additional financial events for my personal situation?

The Pro calculator is a general purpose modeling tool. We seed it with some sample events, but there are many different ways that somebody could model their situation.

Our pre-loaded “Living Expenses” event is just a renamed Withdrawal event. The “Business” event is just an Earned Income event that we pre-loaded for convenience. An Earned Income event mirrors a paycheck stub and is useful if you need to fine-tune your work income stream, capturing all your deductions or for self-employment, for example. Otherwise, you can just rely on the simplified “Work Income” field in People/You or Spouse.

The “Tax Deferred Saving” event is just a Transfer event that we also pre-loaded for convenience. A typical use for that might be extra retirement saving, in addition to what is withheld from a paycheck. If the To Account in a Transfer event is set to “Your Tax Deferred,” for example, it’s an equivalent mechanism to the withholding you see in the Earned Income/Business event. The money is going to the same account and will get the same tax treatment.

The app offers quite a bit of flexibility, since you can add unlimited events and Start/End them on any dates. You can create as many events of as many different types — Deposit, Withdrawal, Transfer, Earned Income, Pension, Property — as you need by tapping NEW. And they can Start and End in the simulation years of your choosing. You can also rename or delete existing events by long-pressing on the event in the list and selecting off the popup menu.

Can users specify whether a pension has an annual cost of living adjustment?

Financial events can be set to inflate, or not, at the general inflation rate in Settings, either Before or After their Start Year (or both). Additionally, any event, including Pension events, can have Extra Inflation assigned (which may be negative), to further adjust the general inflation rate.

When do I use Inflate Before/Inflate After?

For the Inflate Before/Inflate After options on events, you have to look at each individual situation. For starters, Inflate Before is only relevant if the event starts sometime in the future. Maybe you are scheduling a car purchase 3 years from now. You would probably check Inflate Before, because the price of the car would rise with inflation before you purchased it. Inflate After has to do with inflation once the event has begun. Living Expenses are ongoing from the start of the simulation, and we would expect them to increase with the inflation rate, so I would check Inflate After. For a 401k contribution it depends on whether you intend to increase your contributions over the years, or keep them at the initial level.

How do I use the Property event?

Property events model the purchase of real estate in the Start Year, which can be before the simulation start. If you supply a Purchase Price, Financed % (0-100), APR % (~4% these days in U.S.), and Mortgage term (15-30 yr) the program will compute a mortgage payment, which is withdrawn from the From Account. The corresponding Property column in the Cash Flow report will show the market value of the property, so is positive and increasing with inflation. The corresponding Loan column shows your loan balance, so will be negative, and moving to zero as the loan is paid off. If you set an explicit End Year on the PropertyEvent, that means the real estate is being sold in that year, vs. being held indefinitely. The Home Property column goes to zero in the year you no longer own the asset. Set End Year to “unending” if you want to own the home for the duration of the simulation.

Do I need to adjust my living expenses to account for taxes?

In both the Free and Pro calculators, taxes are handled separately from your expenses input. In the Free calculator, you enter an effective tax rate, which is applied against your income each year. The Pro calculator does detailed federal tax calculations internally. You will see these documented in the Log report. So, with either calculator, it is never necessary to estimate your tax obligation in the other inputs.

Why am I getting warnings about Net Investment Income Tax late in retirement?

Note the income thresholds for this tax are not indexed for inflation. That means you may be subject to this tax at relative modest income levels in later years of a simulation. The tax is included as part of your federal income tax in “other taxes.”

Also, the IRS states that investment income includes, but is not limited to: interest, dividends, capital gains, and several other categories. Thus, even if you don’t own stocks/bonds, simply having some accumulated cash earning interest during later years of a simulation could subject you to this tax.

There is more detailed information available from the IRS here.

Why don’t you offer historical or Monte Carlo analysis?

We hope to. It will depend on user demand. Historical simulations are already working internally, but we haven’t built a user interface for them yet. Monte Carlo is on the drawing board. That said, I’ve written extensively on the tradeoffs between Monte Carlo, historical, and average return analysis. After all is said and done, I’m not sure that simple average return (as offered in the v1 release) isn’t the best starting point for most people, most of the time. More often than not, that’s all I use for my own retirement analysis.

Why doesn’t the app do more automated financial planning for me?

CIRY Pro is a high-fidelity retirement model that performs detailed tax calculations, shows your marginal tax rate, and gives you flexibility via financial events for manually experimenting and fine-tuning your withdrawal strategy.

You can change the withdrawal order by long-pressing an Account name and choosing Move Up/Down. You can Enable/Disable events and use the Percent Amount Type to compute an event amount based on an account’s size. You can use Floor/Ceiling on the Cash account, and Rebalancing on investment accounts. You can use Transfer events to move money between accounts (Roth conversion), and the app will handle any tax consequences.

The model produces a high-fidelity view of your cash flow in retirement. It is currently up to the user to then optimize that cash flow to their purposes. Over time we may add some automation to that process, but this is the initial release of a very inexpensive app, so expectations should be modest. In the long run we would like to offer more automated intelligence for optimizing withdrawals and taxes, but that will depend on attracting an active user base to support our development efforts.