As promised, our free optimal retirement income calculator continues to improve based on your feedback. Thank you to everyone who has provided suggestions by contacting us! In this post, we highlight some of the most recent enhancements to this free online resource.
A Glide Path?
The term “Glide Path” is used to refer to shifting from one asset to another. Previously, our optimal retirement income calculator kept a retiree and their spouse’s asset allocation fixed. For example, our calculator previously maintained a fixed allocation (e.g. 60% stock and 40% bond) each year by drawing down accounts appropriately. Unfortunately, such an assumption is not entirely realistic. Instead, many retirees may wish to slowly reduce their “riskiness” in stocks and increase their “safety” of bonds during retirement.
One percent is a typical glide path, meaning that a retiree who is 60 years old starting with an asset allocation of 60/40 (stocks/bonds) will shift their asset allocation to 59/41 at 61 years old, 58/42 at 62 years old, and so forth.
Other updates to our optimal retirement income calculator
We also updated a number of the default values used to better reflect “typical” retiree demographics, as well as expected macroeconomics and capital market conditions. The list below summarizes these default changes.
- Retiree and spouse default ages changed to 65 and 62. This difference of three years is consistent with the average difference in retiree and spousal ages.
- The long-term rate of return of stocks and bonds set to 7.2% and 4%, based on the lifetime annualized returns for our stock and bond ETFs IVV and AGG.
- We set the retiree’s fraction of cost basis for stocks/bonds assuming a 10-year gain at their long-term rates. So, the cost basis for stocks stayed at 50%. But, the cost basis for bonds increased to 68%, since over 10 years, bond capital gains and reinvestment of dividends would yield a higher cost basis.
- Inflation rate set to 2.1%, based on an AR(1) stochastic process model and annual CPI (consumer price index) data from 1992-2020.
We hope you find these updates helpful as you plan for your financial future! Please stay tuned as there are still several suggestions we are still working on that will appear in the coming months.
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