Modeling Retirement Incomes & Expenses

Retirement income calculators can be found online. They suffer from the same flaw. The rate of inflation one suggests in the interview is applied to one’s SSI benefit. But SSI COLAs are based on the CPI, which likely understates one’s personally experienced inflation rate. A work-around is to build a spreadsheet in which all variables --one’s expenses and various income streams-- can be adjusted individually.

If one assumes that one’s SSI benefits will never be increased for inflation, as won’t one’s pension --which is typically the case-- and if one assumes that one’s personally experienced inflation rate is 10% per year and that there will be no gains from one’s investments, then it can be asked, “At what age will I run out of money?”

If the answer returned is age 100 or more, then that suggests --but doesn’t guarantee-- that there’s no need to screw around in the equity casinos trying to accumulate money that one isn’t likely to be needed.

The oldest living male, so far, was 112. The oldest female, 122. But the odds of achieving those ages are small. A more realistic target for males is age is 102. (For females, it’s a few more years.) Why 102? Because of the original 100,000 cohort of males in your birth year, there will be still alive only 200 of you, which works out to a 1 in 500 chance of needing enough money to get to age 103. That’s still a risk. But it’s one I’m willing to tak, given that when I run that infaltion rate and that gains rate on my own expenses and investments, I tag 104 before I’m out of money. Hence, between my pension, SSI benefit, ads savings, I have zero need for investment income. That means --to me–that I can sleep at nght, worry-free about neding more money than I already have.

The advantage of building one’s own retirement income estimator is that the inflation rate can be lowered to a more likely level, say 5%, and the investment gains rate can be made negative, such as an annual loss of (-8%) across all of one’s investment accounts. If tha tis done, the returned number says that I don’tun out of money until age 106. Again, that number is an estimate, not a guarantee. But its trend does suggest this. If I want to screw around in the equity casinoes making bets that don’t pay off, I can do so as long as I don’t over-bet my hand or do anything too terribly stupid.

That fact that I have built those kinds of layers of financial protection is the reason why I am very risk-adverse in what I buy and what I trade. But my actual track record is pretty decent. From 1984 --when I began keeiong records-- to present, my annual net-worth gain has been 12.9% per year, or about the stock market has historically averaged, even though I typically own very few stocks, funds, or ETFs.

So, here’s the point of this post. Investment-wise, trade-wise, no one be inspired to do what I or anyone else reports having done, no matter how good the documentation, because those opportunities are water under the bridge and long gone. Instead, there are only the uncertainies of tomorrow’s market, which we’re all scrambling to make sense of in our own ways.


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