"Vanguard Retirement Nest Egg Calculator"

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Taylor Larimore
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"Vanguard Retirement Nest Egg Calculator"

Post by Taylor Larimore » Wed Jun 18, 2014 3:04 pm

Bogleheads:

Vanguard's "Nest Egg Calculator" may be well-known to others, but I discovered it today for the first time. I like calculators that are simple and quick like this one:

Vanguard Retirement Nest Egg Calculator

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: "Vanguard Retirement Nest Egg Calculator"

Post by MP173 » Wed Jun 18, 2014 3:30 pm

That is certainly handy.

Thanks for the link.

ed

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Re: "Vanguard Retirement Nest Egg Calculator"

Post by tennisplyr » Wed Jun 18, 2014 4:32 pm

Been using it for a while and think it's fabulous
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Re: "Vanguard Retirement Nest Egg Calculator"

Post by bhsince87 » Wed Jun 18, 2014 4:37 pm

Wow, that's sweet!

I had no idea it existed.

Thanks, Taylor!
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Re: "Vanguard Retirement Nest Egg Calculator"

Post by longinvest » Wed Jun 18, 2014 6:24 pm

This Nest Egg Calculator uses the very risky SWR withdrawal model (Safe Withdrawal Rate) which can prematurely deplete your portfolio, if you are subject to an unlucky sequence of returns. This does not seem prudent.

Our Wiki contains a different Nest Egg Calculator, the more robust VPW method, which will never prematurely deplete a portfolio. It can be used to backtest a Three Fund Portfolio on historical data sets going back to 1871.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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Re: "Vanguard Retirement Nest Egg Calculator"

Post by steve_14 » Wed Jun 18, 2014 6:43 pm

I personally don't find it useful, since I don't think past returns have much to do with future ones. Better to generate 5000 random portfolios based on our current low return world. Or just knock historical return data down 3% per year or so before the MC.

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Re: "Vanguard Retirement Nest Egg Calculator"

Post by bhsince87 » Wed Jun 18, 2014 8:07 pm

longinvest wrote:This Nest Egg Calculator uses the very risky SWR withdrawal model (Safe Withdrawal Rate) which can prematurely deplete your portfolio, if you are subject to an unlucky sequence of returns. This does not seem prudent.

I don't understand this comment. If their withdraw assumption is "very risky", shouldn't their results be MORE conservative than assuming another withdrawal method?

In other words, if you get an estimated 98% success rate with their method, you should fare even better with a more conservative withdraw rate, such as VPW.
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

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Re: "Vanguard Retirement Nest Egg Calculator"

Post by longinvest » Wed Jun 18, 2014 8:57 pm

bhsince87 wrote:
longinvest wrote:This Nest Egg Calculator uses the very risky SWR withdrawal model (Safe Withdrawal Rate) which can prematurely deplete your portfolio, if you are subject to an unlucky sequence of returns. This does not seem prudent.

I don't understand this comment. If their withdraw assumption is "very risky", shouldn't their results be MORE conservative than assuming another withdrawal method?

In other words, if you get an estimated 98% success rate with their method, you should fare even better with a more conservative withdraw rate, such as VPW.
Unlike the SWR method, VPW is not based on a constant dollar amount adjusted for inflation every year (regardless of portfolio returns), so it does not need to be more conservative. The problem of the SWR method is that it is very vulnerable to low returns during the first years of retirement.

While mathematically more precise, VPW is somewhat like Taylor's withdrawal method:
We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.
Taylor's method and VPW, by reducing withdrawals during bad-return years, are able to adapt and increase withdrawals when good returns come back.

Here is a link to the VPW thread. It contains a complete explanation: http://www.bogleheads.org/forum/viewtop ... 0&t=120430
Last edited by longinvest on Wed Jun 18, 2014 9:02 pm, edited 1 time in total.
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Re: "Vanguard Retirement Nest Egg Calculator"

Post by abuss368 » Wed Jun 18, 2014 9:02 pm

That was very interesting. I am going to show my parents.

Thank you Taylor!
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Re: "Vanguard Retirement Nest Egg Calculator"

Post by NAVigator » Wed Jun 18, 2014 10:19 pm

That was very interesting. I am going to show my children.

Thank you Taylor!
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Re: "Vanguard Retirement Nest Egg Calculator"

Post by Kevin M » Wed Jun 18, 2014 10:37 pm

Fun to play with.

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Re: "Vanguard Retirement Nest Egg Calculator"

Post by tennisplyr » Thu Jun 19, 2014 9:56 am

I never rely on one of anything. I look across available tools like these to see if there is convergence and if I can draw a consistent conclusion. If I can't, I need to be more conservative.
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Re: "Vanguard Retirement Nest Egg Calculator"

Post by Cut-Throat » Thu Jun 19, 2014 10:20 am

bhsince87 wrote:
longinvest wrote:This Nest Egg Calculator uses the very risky SWR withdrawal model (Safe Withdrawal Rate) which can prematurely deplete your portfolio, if you are subject to an unlucky sequence of returns. This does not seem prudent.

I don't understand this comment. If their withdraw assumption is "very risky", shouldn't their results be MORE conservative than assuming another withdrawal method?

In other words, if you get an estimated 98% success rate with their method, you should fare even better with a more conservative withdraw rate, such as VPW.
VPW is ONLY MORE Conservative, if it needs to be. The Problem with a Fixed Withdrawal Method is that to succeed 98% of the time, you have to be very conservative, even if you don't need to be. Hence, you are probably leaving a lot of money on the table for someone else to spend.

VPW is the best withdrawal method I've come across in 10 years of playing with tools such as Firecalc etc.

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Re: "Vanguard Retirement Nest Egg Calculator"

Post by Garco » Thu Jun 19, 2014 10:21 am

According to this calculator, I am going to be rich rich rich after I die.

Seriously, it's a toy (and by definition toys are fun!) but isn't that sensitive to how we live or how we die (e.g., if we end up with long-term care costs).

I like Fidelity's retirement income planner much more. Both that planner and Firecalc give you a better sense of the range of probable outcomes.

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Re: "Vanguard Retirement Nest Egg Calculator"

Post by sperry8 » Mon Jan 09, 2017 2:18 am

Does this calculator include dividends as being reinvested?
BH contest results: 2019: #233 of 645 | 18: #150 of 493 | 17: #516 of 647 | 16: #121 of 610 | 15: #18 of 552 | 14: #225 of 503 | 13: #383 of 433 | 12: #366 of 410 | 11: #113 of 369 | 10: #53 of 282

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Re: "Vanguard Retirement Nest Egg Calculator"

Post by stemikger » Mon Jan 09, 2017 6:10 am

Thanks Taylor!
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Re: "Vanguard Retirement Nest Egg Calculator"

Post by dbr » Mon Jan 09, 2017 10:12 am

sperry8 wrote:Does this calculator include dividends as being reinvested?
I would assume yes and no. Basically the answer is yes in that it assumes certain returns for various assets and returns by definition include dividends. Put differently, cashing the dividends is the same as taking a withdrawal. It could be that during the retirement phase one could withdraw by the mechanics of taking dividends, but the correct arithmetic is to run a formalism of reinvesting the dividends in the sense of getting all the return and then charge a withdrawal. In an accounting like this whether one sells shares to fund a withdrawal or cashes dividends to fund a withdrawal is exactly equivalent. Thinking that cashing dividends is some sort of special end run that avoids depleting a portfolio would be a mistake.

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Re: "Vanguard Retirement Nest Egg Calculator"

Post by sperry8 » Mon Jan 09, 2017 6:28 pm

dbr wrote:
sperry8 wrote:Does this calculator include dividends as being reinvested?
I would assume yes and no. Basically the answer is yes in that it assumes certain returns for various assets and returns by definition include dividends. Put differently, cashing the dividends is the same as taking a withdrawal. It could be that during the retirement phase one could withdraw by the mechanics of taking dividends, but the correct arithmetic is to run a formalism of reinvesting the dividends in the sense of getting all the return and then charge a withdrawal. In an accounting like this whether one sells shares to fund a withdrawal or cashes dividends to fund a withdrawal is exactly equivalent. Thinking that cashing dividends is some sort of special end run that avoids depleting a portfolio would be a mistake.
I don't think that answered my question... I'm under the impression the calculator uses "actual" historical returns to generate its scenarios. What I am wondering if those returns include dividends as reinvested within them?
BH contest results: 2019: #233 of 645 | 18: #150 of 493 | 17: #516 of 647 | 16: #121 of 610 | 15: #18 of 552 | 14: #225 of 503 | 13: #383 of 433 | 12: #366 of 410 | 11: #113 of 369 | 10: #53 of 282

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Re: "Vanguard Retirement Nest Egg Calculator"

Post by dbr » Mon Jan 09, 2017 6:48 pm

sperry8 wrote:
dbr wrote:
sperry8 wrote:Does this calculator include dividends as being reinvested?
I would assume yes and no. Basically the answer is yes in that it assumes certain returns for various assets and returns by definition include dividends. Put differently, cashing the dividends is the same as taking a withdrawal. It could be that during the retirement phase one could withdraw by the mechanics of taking dividends, but the correct arithmetic is to run a formalism of reinvesting the dividends in the sense of getting all the return and then charge a withdrawal. In an accounting like this whether one sells shares to fund a withdrawal or cashes dividends to fund a withdrawal is exactly equivalent. Thinking that cashing dividends is some sort of special end run that avoids depleting a portfolio would be a mistake.
I don't think that answered my question... I'm under the impression the calculator uses "actual" historical returns to generate its scenarios. What I am wondering if those returns include dividends as reinvested within them?
Return always includes dividends. I am not sure what you mean by reinvesting. That is what my discussion addressed. The dividends are either reinvested or they are a withdrawal. If you are running the model with no withdrawals, then the dividends are reinvested.

It may be you are thinking that the calculator uses compound average annual growth rate as return, which is is understood to include dividends reinvested. That is not the case. In each run of the Monte Carlo simulation the calculator samples a return from an assumed distribution of possible annual returns. That distribution can be estimated to be some known form of distribution, such as a normal distribution, which would be described by a shape and defining parameters such as an average and a standard deviation. One can estimate the average and SD by calculating historical simple averages of annual returns, etc. In that case dividends are included by the definition of return but the issue of reinvestment does not apply because we don't use compound growth results to estimate the parameters. The issue of compounding (where reinvestment applies) is computed as the program steps through a sequence of years, sampling and applying a return, and compounding the result. In this process one could reinvest the dividends or one could withdraw them. In reality the program pays no attention to dividends per se. It just increases the wealth by the return and reduces it each year by the withdrawal. The withdrawal amount is set by the program input specified by the user. My point was that whether or not the withdrawal is taken by literally spending a dividend or by reinvesting dividends and selling shares to raise the withdrawal is exactly the same thing in the mechanics of the model.

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Re: "Vanguard Retirement Nest Egg Calculator"

Post by Dandy » Tue Jan 10, 2017 10:30 am

It is fun to play with but I also have doubts about projections based on the past equity and bond performance - especially with bond yields so low. I also don't sign on to variable withdrawal plans since I want to have more stability in withdrawals - not trying to maximize them. I like taylor's approach - which was much easier when interest rates were much higher and equities happened to have several nice bull market decades. But, tightening the belt a bit in hard times usually makes sense as does spending a bit more in good times. For me there is no set it and forget it retirement allocation or withdrawal strategy - each year or so take into account your age, expenses, health and portfolio size and make adjustments when/if needed.

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Re: "Vanguard Retirement Nest Egg Calculator"

Post by nisiprius » Tue Jan 10, 2017 10:42 am

sperry8 wrote:
dbr wrote:
sperry8 wrote:Does this calculator include dividends as being reinvested?
Vanguard has a block of fine print about it. They don't spell it out as clearly as I like but I'm 99% certain the answer is "yes." Reason #1: among other things, that the phrase "returns, about investment "returns" without qualification, usually mean total return, including dividends. Reason #2: it's what every such study I've ever seen, does, and it wouldn't make any sense to do everything else. Reason #3, the phrase "adding your investment return" strongly suggests reinvesting any unspent dividends. I've also underlined the phrase that makes it clear they are adjusting for inflation.

Yes, it would be better if they said so explicitly and referred to "the S&P 500 total return index" (yes, that's a thing) instead of simply the "Standard & Poor’s 500 Index."
The green and orange shaded regions cover the range of possible outcomes for your retirement portfolio, given your starting balance, your annual spending, and your portfolio allocation. We determine these possible outcomes using a technique called Monte Carlo simulation, which involves simulating a large number of potential market scenarios—up and down markets of various lengths, intensities, and combinations. The green region covers those simulations in which you reached your goal (your portfolio lasted for the duration of your retirement), while the orange region covers those in which your portfolio came up short.

Note that the size of the region does not indicate the likelihood of a particular outcome. For example, it's possible that many simulations are concentrated within a small region, or a few divergent simulations are spread over a large region.

We determine the probability that your portfolio will last for the duration of your retirement by tallying the results of each independent simulation. Results may vary with each use and over time.

To account for the effects of inflation, the calculator uses the annual changes to the Consumer Price Index, from 1926 through last year. The results displayed in the chart are nominal dollars.

When determining which index to use and for what period, we selected the index that we deemed to fairly represent the characteristics of the referenced market, given the available choices. For U.S. stock market returns, we use the Standard & Poor’s 90 from 1926 to March 3, 1957; the Standard & Poor’s 500 Index from March 4, 1957 to 1974; the Wilshire 5000 Index from 1975 to April 22, 2005; the MSCI US Broad Market Index through June 2, 2013; and the CRSP US Total Market Index thereafter. For U.S. bond market returns, we use the Standard & Poor’s High Grade Corporate Index from 1926 to 1968, the Citigroup High Grade Index from 1969 to 1972, the Lehman Brothers U.S. Long Credit AA Index 1973 to 1975 the Barclays Capital U.S. Aggregate Bond Index from 1976 to 2009 and the Barclays U.S. Aggregate Float Adjusted Bond Index thereafter. For U.S. cash reserve returns, we use the Ibbotson U.S 30-Day Treasury Bill Index from 1926 to 1977, and the Citigroup 3-Month Treasury Bill Index thereafter.

For each year of each simulation, we randomly select one year of stock, bond, and stable-value returns from the database. Using those values, we calculate what would happen to your portfolio—subtracting your spending, adjusting for inflation, and adding your investment return. We repeat this process, one year at a time, until the end of your retirement or until your portfolio runs out of money. The next simulation starts the whole process from the beginning. After 5,000 independent simulations, we've tested a broad range of possible scenarios, and clear patterns begin to emerge. By keeping track of the number of simulations in which your portfolio lasts for the duration of your retirement, we're able to estimate the probability that your plan will be successful. For example, if your portfolio survives in 4,000 out of 5,000 simulations, we can estimate that the probability of success is 80% (4,000/5,000=0.80).

Of course, it's important to remember that Monte Carlo simulation assumes that the future will be at least somewhat like the past—after all, we're using historical data in each simulation. In actuality the future may contain scenarios that are better or worse than anything considered by this tool. It's also important to remember that, despite the sophistication of this method, this calculator makes a number of simplifying assumptions, so these results should never form the sole basis of your financial plan. In particular, the Monte Carlo methodology used here assumes no relationship between asset-class returns from one year to the next. Randomly selected years are considered in sequence. For example, in a given simulation the returns on stocks, bonds, and short-term reserves for 1982, when the nation was deep in recession, could be followed by the returns for 1999, a bull-market year.

Finally, Monte Carlo simulation is one approach for modeling the range of possible future investment outcomes. Because other methodologies differ in certain assumptions, they may yield different results.
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Re: "Vanguard Retirement Nest Egg Calculator"

Post by zengolf2011 » Tue Jan 10, 2017 11:02 am

Thanks as always, Taylor! The key assumption is that future returns for the future will resemble the past. I am in the distribution phase, and my horizon is 25 years. Many respected analysts (]e.g., Mr. Bogle, Vanguard, McKinsey Global Institute) expect lower to sharply lower returns for the next 10 to 20 years -- perhaps as low as 3% in real terms. I view this as cause for caution, at least for the next few years. I'm also mindful of Mr. Swedroe's remarks on incurring risks for added wealth with little marginal utility.

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Re: "Vanguard Retirement Nest Egg Calculator"

Post by sperry8 » Tue Jan 10, 2017 7:03 pm

nisiprius wrote:
sperry8 wrote:
dbr wrote:
sperry8 wrote:Does this calculator include dividends as being reinvested?
Vanguard has a block of fine print about it. They don't spell it out as clearly as I like but I'm 99% certain the answer is "yes." Reason #1: among other things, that the phrase "returns, about investment "returns" without qualification, usually mean total return, including dividends. Reason #2: it's what every such study I've ever seen, does, and it wouldn't make any sense to do everything else. Reason #3, the phrase "adding your investment return" strongly suggests reinvesting any unspent dividends. I've also underlined the phrase that makes it clear they are adjusting for inflation.

Yes, it would be better if they said so explicitly and referred to "the S&P 500 total return index" (yes, that's a thing) instead of simply the "Standard & Poor’s 500 Index."
Thanks, just wanted to be sure. I've found some blogs and books seem to quote an Index return rather than the total return including dividends. It obviously makes a big difference in the findings.
BH contest results: 2019: #233 of 645 | 18: #150 of 493 | 17: #516 of 647 | 16: #121 of 610 | 15: #18 of 552 | 14: #225 of 503 | 13: #383 of 433 | 12: #366 of 410 | 11: #113 of 369 | 10: #53 of 282

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Re: "Vanguard Retirement Nest Egg Calculator"

Post by warowits » Tue Jan 10, 2017 11:29 pm

I was poking around there and another tool I found was the Retirement Income Calculator. The thing about that tool I find the most interesting is that by default it anticipates a 5% yearly return before inflation. Does vanguard really expect a 2% real return from a stock and bond portfolio going forward?

https://retirementplans.vanguard.com/VG ... meCalc.jsf

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Re: "Vanguard Retirement Nest Egg Calculator"

Post by Portfolio7 » Wed Jan 11, 2017 10:04 am

If you assume a 4% withdrawl rate on 25x expenses, you seem to top out in the high 80's success rate using 40 years as your goal. Go 50 years and it's low 80's. This suggests that the 9-12 times income benchmarks are highly questionable, which I think most people on this forum already believe. Fidelity has an expense-based analysis (not sure if it's paid for by employer or if any client can use.) It tells me that in a low-return environment and with my expenses, I have an 83% chance to be able to retire by age 60... which may or may not synch with the Vanguard tool, depending on how income and returns play out over the next decade. The Fidelity model is a bit intricate, though of course with any such model you are depending on the assumptions built into the model by the creator.
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Re: "Vanguard Retirement Nest Egg Calculator"

Post by dbr » Wed Jan 11, 2017 10:20 am

My comment is that it is not conceivable in a million years that someone developing a professionally credible retirement model put online by a major brokerage company would somehow use inputs that do not include dividends in the return if they are looking to historical data for the input. I am still confused by whether or not the term "reinvested" was considered by the OP to mean something in particular for this type of model.

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