Review: The Pralana Retirement Calculator
The reviews of free retirement calculators here have been some of the most popular posts on the site. There are certainly some useful free calculators available. And since no one calculator has a corner on predicting the future, it’s nice to have the option to run several and compare the results, without having to pay for the privilege.
But readers asked: “Given the stakes, shouldn’t I consider paying for a more powerful or more accurate retirement calculator?” Maybe, maybe not. This question assumes that you actually get more value when you pay for software. And it assumes that it is possible, in theory, to achieve more accuracy when predicting the future. I dealt with those issues in my post Should You Pay for a Retirement Calculator?.
That post doesn’t actually review paid calculators, but it does list several that I could recommend investigating further. Of those calculators, one — the Pralana Retirement Calculator — stands out as meriting a closer look now. That’s because it’s a relative newcomer, and the author has been proactive in responding to users and adding new features, including several requested in my post The “Perfect” Retirement Calculator.
The Pralana Retirement Calculator (PRC) is a powerful, paid ($99) retirement planning option, with extensive features which I’ll review shortly. But, if you’re new to the topic, PRC doesn’t need to overwhelm you. That’s thanks in part to the Simple Input screen for new users. You can optionally input just a dozen or so variables to get started. You can run an initial simulation, then you can dive much deeper into the program for a more refined and sophisticated analysis.
Even if you don’t think you’re in the market for another retirement calculator, you should consider PRC. Why? First, as I’ll explain in more detail below, the 3-way simulation using fixed rate, Monte Carlo, and historical return analysis is unique, giving you the best of all worlds. Second, PRC decomposes the retirement modeling problem into a valuable framework for anybody who is interested in this issue. Specifically, the organization of the input screens will get you thinking about the really important variables in your own retirement.
Finally, PRC/Basic is free, at least through 2014! That’s right, just by signing up for the PRC newsletter (which you can unsubscribe from at any time), you can download the free Basic calculator. And PRC/Basic is a highly functional, state-of-the-art retirement calculator. It is missing a few features from the full version such as side-by-side comparison of multiple scenarios, consumption smoothing, life insurance recommendations, and 529 Plan contributions, as well as printed reports. But you can get a lot of mileage out of the core features that are available in PRC/Basic.
PRC Input Features
PRC embodies the philosophy that there is value in basing projections on detailed inputs rather than rough estimates, despite the uncertainties in future inflation rates, investment returns, and life expectancy. And it is surely one of the more richly featured retirement planning tools available. It provides a wealth of control over your retirement scenario, with numerous options for assets, accounts, income, inflation, investment returns, tax rates, Social Security, pensions, annuities, life insurance, property, children, healthcare, and other expenses.
PRC features very flexible input for your assets. You can set the average rate of return, standard deviation, and investment expenses for each asset class. You can also associate a historical sequence of returns — the program’s or your own — with any asset class. And you can set an asset allocation for each type of account (regular, tax-deferred, and Roth) for up to two periods.
PRC allows for describing income streams in great detail. You can control pre-retirement, self-employment, pension, post-retirement, alimony, child support, windfalls (stock options, inheritance), and a fixed annuity — in most cases for both a retiree and spouse, separately — a feature I often hear requested from readers. Thus the program easily handles the situation of spouses retiring at different times.
PRC calculates your actual Social Security benefit based on your start age and also handles spousal and survivor benefits. And it potentially replaces dedicated software tools that optimize your Social Security start age. PRC does more than just identify your path with the largest long term income. It also examines savings, taxes, and survivor scenarios. Interestingly, because so many people find peace of mind in starting Social Security earlier than optimal, PRC also finds solutions with earlier start dates that are almost as good as the best one. You might prefer these, and, if you were to die prior to your life expectancy, then they would provide better long term benefits than the calculated “best” solution.
The program includes extensive capabilities for modeling the disposition of your property. You can set up scenarios for downsizing a home, and model changing ownership costs such as interest, taxes, insurance, and maintenance, for example.
PRC offers extensive support for modeling miscellaneous discretionary expenses. These can be set for up to four phases of life: pre-retirement, early post-retirement, late post-retirement, as well as after the death of the retiree or spouse. The program offers some help with individual expense categories, though users are still on their own to fully understand and estimate their expenses before and after retirement.
Much attention has gone into the modeling of healthcare expenses. You can set a separate inflation rate for healthcare. And you can model those expenses for up to five phases of financial life: working, retirement for one or both of you, on Medicare, and after one spouse has died.
Finally, PRC is almost unique in the realm of retirement calculators in performing detailed federal income and FICA tax calculations. (You still must estimate any state or local taxes, though.)
Simulation and Analysis
Once you’ve entered all your personal data, you’re ready to perform an analysis.
If you’ve spent time reading about retirement calculators, you’ll know there is an ongoing debate over how to best model investment returns over the course of retirement. At issue is how to account for the effects of market volatility. The simplest approach is fixed rate analysis — just using the same average annual rate of return for every year in retirement, perhaps reduced to account for volatility or high market valuations. Then there are more complex approaches that attempt to model market volatility directly: Monte Carlo analysis which uses an average return plus standard deviation to create “artificial” randomness, and historical analysis which uses sequences of real-world returns from history, assuming that future variations will be similar to the past.
There are wise heads advocating for each of these approaches, and yet there is no clear consensus. PRC, unlike most other retirement calculators, doesn’t choose sides in this battle. Instead, it offers all three methods. So PRC performs these simulations when you run an analysis:
- Fixed rate — based on fixed inflation, rates of return, and investment expenses. Because of the simplicity, this is particularly useful for lifestyle decision making. You can use it for analyzing scenarios that are unrelated to portfolio volatility, such as housing or post-retirement income options.
- Monte Carlo — runs 500 simulations using a random rate of return computed from an average rate of return and a given standard deviation over a normal distribution. The results are analyzed to identify the 5th, 50th, and 95th percentiles.
- Historical — uses historic rate of returns and inflation, beginning in 1928 and each subsequent year and proceeding in chronological sequence for the expected length of your retirement. The program does as many simulations as possible, given 85 years of historic data, and then identifies the best, worst, and median cases.
PRC also plots the output from these simulations on a single output graph so you can see and judge for yourself whether the differences are important in your case. Thus you can easily see a graphic illustration of “volatility cost” by viewing the best and worst case Monte Carlo and historical results against the idealized fixed rate projection. This overlaid graph of the different simulations is impressive and unique to PRC, so far as I know!
PRC’s output is notably rich in both graphical and tabular formats: summary panels provide a quick check of input data, easy-to-understand graphs illustrate simulation results, and detailed tables are available for precisely checking the calculations. The Projection tab shows all the significant output variables for each year culminating in net worth, making it easy to verify input data, calculations, and cash flow. You can also customize this view in a separate tab, to display just those columns of interest.
To test the Pralana Retirement Calculator, I used it to calculate the retirement scenarios from my first and second retirement calculator articles.
The first of my scenarios involves a 60-year old couple retiring now in advance of Social Security. For this scenario PRC shows an ending net worth of $291K for the fixed rate analysis, $145K for the Monte Carlo 50th percentile, and about $1.1M for the historical median. Broadly speaking, those numbers appear to be more conservative or pessimistic than the three other calculators I used for this scenario.
The second of my scenarios involves a couple in their 50’s, still working, hoping to retire in their 60’s. For this scenario PRC shows an ending net worth of $373K for the fixed rate analysis, $190K for the Monte Carlo 50th percentile, and about $1.7M for the historical median. Again, broadly speaking, PRC appears to be the more conservative or pessimistic of the six other calculators I used for this scenario. Though in this case its historical simulation is the most optimistic.
The author of PRC makes a compelling case that the differences we are seeing in calculated results are largely due to errors in the other calculators — how initial conditions are handled, how taxes are estimated, and how savings are modeled prior to retirement. And it’s clear that PRC is more accurate in some areas — taxes, for one. But there are many possibilities for variation. When comparing PRC results to those from other calculators, it’s important to understand that PRC doesn’t give a single “answer.” Rather, you could say it gives three answers — one for each type of simulation — fixed rate, Monte Carlo, and historical. And, despite reasonable care over several days, my own results with PRC don’t duplicate others exactly.
Rather than point fingers or invest more time tracking down the differences in math, I’d rather just observe that using retirement calculators in the real world is a complex process. If professional engineers and financial advisors have difficulty achieving precision, what should the average user expect?
Software development is a complex enterprise plagued by imperfection. PRC, though an impressive effort, is not immune. For starters, the program is influenced by being built on top of the Microsoft Excel spreadsheet software. This has pluses and minuses. On the plus side, many complex numerical operations are “built-in” and pre-tested by Microsoft. On the minus side, the software’s user interface is not as flexible or as fast as a dedicated program would be. Loading, saving, calculating, and scrolling around the program can be sluggish.
Most of the input screens are very dense with information and might be overwhelming to non-technical users. Some would probably appreciate more of a step-by-step interview process instead of the standard spreadsheet interface. You’ll find yourself needing to hover over the small red triangles at the edge of cells to get help, and even that may not always be enough to clarify every input field. Though there is extensive documentation embedded in the program, it is often very dense as well. However, the material is authoritative and insightful, and you will surely understand retirement modeling much better if you study it in detail.
Lastly, though there are many options, the program does hard-code certain aspects of the analysis that you might eventually want to change. These include withdrawal priority: taxable, Roth, tax-deferred; annual rebalancing to maintain asset allocation; some aspects of 529 savings plan treatment; Social Security benefits inflation; and various fixed-length lists such as the number of children or number of scenarios.
Given its plethora of input variables and the power of three different simulations, if I had to make a life or death financial decision, I would certainly feel safe using PRC. Does that mean it is more correct or accurate than other calculators? That’s a difficult question for me to answer. For starters, there are subtle differences in the input requirements for the different calculators that make it difficult to compare them perfectly. And as I’ve often stated, I question any calculator’s ability to predict events that are decades in the future. That said, I consider PRC to be a professional and reliable tool, and it’s one I’ll probably turn to for some of my own planning tasks.
As I’ve said, there is no reliable way to predict the future. And PRC is tailor-made for illustrating this point, since it easily lets you run and compare the three most popular methodologies for simulating investment returns: fixed rate, Monte Carlo, and historical. What do we see when we look closer at those results? Well, in my first scenario, PRC shows a worst case of going broke after about 25 years of retirement, and a best case of dying with a net worth of about $3M. In my second scenario, it shows a worst case of going broke after 30 years of retirement, and a best case of dying with a net worth over $4M. That’s a huge spread in results: ranging from going broke to dying a multi-millionaire!
Note that PRC’s three simulations generate this wide range of outcomes based on the same income and expenses. The key remaining variables are inflation and the rate of return on your investments, which essentially conflate into one variable: your real rate of return. So that single variable encapsulates most of the outcome of your retirement. And nobody, but nobody, can predict it! Because of that, our very best, state-of-the-art, retirement calculators generate results over normal retirements that can vary by millions of dollars….
PRC is a powerful tool, but you must understand how to apply it. It can be very helpful for tactical decision making — such as how to handle taxation of retirement income, downsize a home, or take Social Security benefits. It can also be an effective “early-warning” system for whether your retirement is headed onto the shoals — towards the lower edge of the envelope of possible financial outcomes. But, if you’re seeking numerical certainty about your finances decades from now, you are bound to be disappointed by this and all retirement calculators.
In a nutshell, PRC is a compelling option for retirement and lifestyle planning. The spreadsheet-based user interface can be a bit quirky, and the more advanced options are not for the faint of heart. But the Simple Input screen provides an easy route to initial data entry. And, from there, the program offers powerful options and unique features — such as a graphical comparison of the three most popular retirement simulations.
Lastly, PRC/Basic is free, for now. So what do you have to lose?
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