3433-vol. 6 issue 2-3.pmd - iarfc

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62 Journal of Personal Finance THE HISTORICAL RETIREMENT INCOME PROJECTOR MODEL - UPDATED, UPGRADED, AND MORE ACCESSIBLE Michael D. Everett, Ph.D. Professor of Economics East Tennessee State University Murray S. Anthony, Ph.D., CPA Professor of Accountancy East Tennessee State University Gary D. Burkette, Ph.D. Associate Professor of Accountancy East Tennessee State University ABSTRACT This article presents a more accessible and enhanced revision of a retirement income projector model which uses actual (not average) yearly historical returns (Everett, 1995; Everett & Anthony, 2002). This allows users to test drive different portfolio strategies over different historical time periods and evaluate the outcomes. The program builds existing retirement assets and new savings up until retirement, then during retirement the model takes out enough accumulated assets to supplement other retirement income sources to meet target retirement income. The authors converted the program to a widely accessible spreadsheet software (Excel) and upgraded the program to consider increased medical costs and decreased Social Security benefits during retirement. The revised model also incorporates easy-to-read output charts and updated asset returns data through 2005. Financial advisors and laypersons with basic Excel spreadsheet skills should find this model useful for analyzing individual risk-return tradeoffs for long-term retirement portfolios using different investment strategies. This article presents a more accessible and enhanced revision of a historical retirement income projector model (HRIPM) which uses actual (not average) yearly historical returns (Everett, 1995; Everett & Anthony, 2002). ©2008, IARFC All rights of reproduction in any form reserved.
Volume 6, Issue 2 & 3 63 These type models allow users to “test drive” different financial retirement strategies - assets, savings rates, desired retirement dates and target incomes - over historical periods (or “roads”) to see what actual retirement assets and income would have resulted. This may provide a better assessment of risks and returns for various strategies than traditional retirement income projector models such as Raymond James (2007) or Vanguard (2007). Most of those rely on long-run average or geometric mean historical returns and thus miss the shorter-run variations which impact individual strategies. Simulation models can pick up some variations with ranges of returns from low to high, but to the author’s knowledge, only one high priced commercial model (ORTEC, 2004) as described by van Welie, Janssen, and Hoogstrate (2004) seems to tailor those ranges to specific time periods. The enhancements in this version of HRIPM include: conversion to a widely used and available spreadsheet software (Excel) 1 ; addition of other risks to retirement income and assets such as reductions in Social Security benefits, long-term care costs, and increased medical expenses; improvements in the programming; charts which make reading retirement asset and income results easier; and returns data updated to 2005 to incorporate the bear stock market of the early 2000s. This article demonstrates the revised HRIPM by explaining how to input data to build a long-term financial retirement strategy and how to read the resulting data outputs for different trial runs over different time periods. The article ends with a discussion of the usefulness of the revised, more accessible HRIPM model and additional possible enhancements. The Users’ Data Input Section This section of the HRIPM model (Worksheet 1) allows the individual user to build a long-run financial retirement strategy. The next section (Worksheet 2) allows the individual to run that retirement strategy over different historical periods and view its performance. Both sections demonstrate some of the upgrades in this version of the model. Research & Theory Personal Data Inputs In the top half of Worksheet 1, shown in Figure 1, personal input data remains clear, but some features may require explanation. Note that these input data represent real purchasing power dollars. Thus, with inflation, the user would have to increase actual savings in nominal dollars to keep the real savings constant while Social Security and retirement income would equal higher nominal amounts in the future. “Example” represents a typical, middleage-income individual with moderate assets and savings. The new, lower assumed increase in the market value of Example’s non-financial assets, in this
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Volume 6, Issue 2 & 3 3 RESEARCH &
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