Forecasting Retirement Income Success

One of the retirement planning tools I use comes from Financial Engines via my 401(k) provider. This service is free to all account holders. If you enter your retirement income goals and information about retirement income sources (investments, pension, and Social Security), Financial Engines will generate and email a periodic progress report and retirement forecast.

The report is not your standard investment performance report. Instead, it hits you in the face with a statement of how likely or unlikely your current investments and contribution levels will generate the retirement income that you have set as your goal. The report also indicates (on a scale compared to other portfolio types) the amount of risk you are taking. Finally, the forecast tells you where your retirement income will come from.

The Financial Engines retirement report methodology is supposedly proprietary. They do tell you that it uses Monte Carlo simulations of thousands of different investment scenarios and outcomes. The income projections are derived from an assumption that you would annuitize all of your retirement investments at your retirement age. You wouldn’t do that of course but it is a logical way to compare different outcomes.

The changes in our retirement income forecast through 2009 were quite dramatic. I selected a retirement income goal based on a retirement age of 62 and a retirement spending plan that was comfortable but neither spartan or luxurious.  I won’t fully retire at 62 but I wanted to know what would happen if I did.

When I first created this plan in 2007, my forecasts consistently exceeded a 95% probability of reaching our income goal. This means of the thousands of simulated economic and investment performance scenarios, our retirement income goal would be achieved in more than 95% of them.  On February 24, 2009 (just before the market turned north), I received an email report that the probability forecast had dropped to 36%! That’s a serious wake-up call to action.

According to my analysis, our best plan of action was to stay invested while increasing cash-equivalent holdings. My next report arrived on May 11, 2009. Now the forecast had jumped back up to 70%. Another retirement forecast report was sent on August 11. The forecast probability has increased again, to 80%.  On November 24, 2009, the last emailed report, the forecast was back ino my comfort zone of greater than 95%. The tool also tells me that 30% of our retirement income will come from Social Security and the balance from our personal investments. No pensions for us.

I can check these forecasts at any time by logging into my account where I can also receive automated advice on portfolio adjustments I could make to improve our odds. I have never used the Financial Engines advice , preferring to scenario test my own portfolios.

I like the Financial Engines retirement income forecast tool. It’s not perfect but watching how investment choices and market conditions affect retirement income predictions certainly keeps me engaged and vigilant.

What tools do you use to forecast retirement income success?

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