This is the game
This game attached at the end of this page is a retirement game in Excel for a 25 year old. It has a very simple and very reductive view of some of the main processes involved in a full life-cycle of earning, saving, and retiring. This came from a question my daughter gave me that I could not answer about how much she'd save by retirement. That's a hard question. I sorta kinda answered it in person then I went to the RH laboratory and cooked up the game. Others have done this better; this is my attempt. It has:
- income growth and human capital considerations
- spending, inflation, and lifestyle creep
- a net wealth process that comes from initial wealth, net savings, and real returns net of fees
- a chosen retirement age with some potential changes in lifestyle after retirement, and
- longevity probabilities (and some possible changes to longevity science if one wishes)
It looks like this:
The game rules are here:
1. The traditional game
- cover a lifestyle to at least an average age expectation (preferably higher) i.e., don’t run out of money before you run out of life
- but without baking in unrealistic return expectations
- or retiring too late past age 65
- or crimping retirement lifestyle too much
- try to retire early with same restrictions
Maybe since the audience is 25 we could make it a drinking game? You know, some kind of two player game with adjustments to the sheet at each turn and the closest to covering most of the longevity distribution but with the highest lifestyle spend after 3 moves each wins...Loser takes a shot. Might require a referee especially when it comes to return expectations. But these rules would maybe take us closer to a game that needs utility math which is not this game.
Also if I were serious I'd think about it as a real game. One could think of "blocking moves" such as shifting longevity out or throwing a spend shock (not in the sheet) at an opponent.
2. Spending -- This inflates from an initial state at an inflation rate plus an additional trend that I want to call lifestyle creep. The creep stops and sticks to inflation at the retirement age. That is a bold assumption but there it is. This can be bumped down at retirement by x%.
3. Net wealth -- This starts with an initial wealth level, say zero. Then the process is: current period wealth is last period wealth times a net nominal return plus or minus net savings. Return is split into inflation and real incremental return and then a factor for fees/taxes/vol.
4. The "sustainability check" is basically a test at retirement to see if what has been achieved in terms of the wealth/spend rate compares favorably to the wealth unit multiple from a rule of thumb (the recommended multiple). In this case I use my own age-adjusted rule of thumb that is vaguely linked to a constant-risk 95% success rate at a given age. It is generally pretty good at protecting from superannuation risk, in my opinion. The ROT is 1/RH where RH is an age specific spend rate suggestion = [Age / (40 - age/3)] /100. This is debatable of course.
These are some of my hints:
Earn incrementally more than normal through education and a little bit of ambition and do it early
Spend less than income and don't let lifestyle-creep creep in
Cut lifestyle (before or) when income ends
Work longer if necessary
Don't expect giant real-return alpha to save you any time soon
If you are playing to win it's maybe a little like my last new year's resolution (tongue in cheek):
- start smoking and drink more i.e., move the longevity mode down
Be aware that real longevity is increasing and also that retirements are earlier
Don't expect low inflation to save you
There is a tiny field with a big impact. Be aware of it. It's the one that implicitly ding's net returns for:
- taxes on returns
- investment fees
- the long term effects on expected returns of high volatility (i.e., not good)
My Disclaimers to which I will add as I think of the dumb things I missed:
This is not advice and it is clearly and radically over-simplified and annoyingly reductive. This was just for fun for my daughter and me but then again it does not completely lie about some of the forces that affect retirement success. Use it at your own peril but enjoy it as a game.
Also one should note that most of the variables in the game would be random in a more sophisticated analysis so the net wealth outcomes would really be distributions in a more honest model but just one number that could be radically worse or better in our one run at real life. Maybe that is in another version of the game.
The game will be different for a 30 or 40 year old. More has been saved (hopefully). Longevity expectations are different. Accumulation compounding is shorter. Maybe that is all in another game someday.
Also one should note that most of the variables in the game would be random in a more sophisticated analysis so the net wealth outcomes would really be distributions in a more honest model but just one number that could be radically worse or better in our one run at real life. Maybe that is in another version of the game.
The game will be different for a 30 or 40 year old. More has been saved (hopefully). Longevity expectations are different. Accumulation compounding is shorter. Maybe that is all in another game someday.
The link is here:
lovely calculator Bill. Thanks @bondlady
ReplyDeleteForgot I did this one...
Delete