In keeping with my Integrity Policy, I want to let you know that depending on your level of assets, I may receive a referral bonus if you click one of the Personal Capital links on this page, sign up, and link investment accounts. Personal Capital is a free service. They are looking for high-net worth individuals as possible customers for their financial advisory services, but the expense tracking and retirement planning tools shown in this article are completely free to use.
If you’ve been reading this site, you know that we’ve got a plan. But how do we know whether we’re on track to succeed? It turns out Personal Capital has a pretty great tool to test retirement plans. I played with it tonight, took some screenshots, and decided to create a little tutorial for you.
Test Retirement Plans – Step-by-Step
First, log in to your account at Personal Capital. Make sure you have all of your investment accounts linked, as the expected returns going forward will be influenced by your past performance.
Under Advisor Tools, click “Retirement Planner.” This will open a screen with some default, probably grim, values for your retirement. As you can see, the chances of retirement any time soon look pretty slim. With some of the auto-generated values, Personal Capital concludes that my retirement could only survive a few years.
Scroll to the bottom of the screen and you’ll see the Income Events and Spending Goals sections of the retirement plan. This is where we’ll teach Personal Capital about what our post-retirement spending, and our savings on the way to retirement, are going to look like.
The software got a few things right, and a few things wrong. First off, it only expects me to save $45K a year, and it also believes that I only have $95,000 in assets. Click the little pencil next to the Savings item, and let’s update those to values which more accurately reflect my savings plan. I’ll update my amount saved so far to $100,000 (the system only allows you to change values in $5,000 increments) and my planned savings per year to $65,000. I’ll leave the yearly savings increase at the default of 3.5%.
OK, with that done, and leaving Social Security alone, I’ll update my retirement spending by clicking the pencil next to that item. I’ll update my retirement spending to a smaller value of $60,000 per year (still crazy high!) and if necessary, change my desired retirement age.
Now I’ll click the “Edit Assumptions” button under the “Income Events” section. This opens up a set of global values for taxes, life expectancy, and inflation. By default, I feel that both the tax rate and inflation values are too high. I don’t expect to pay much in taxes in retirement, so I’ll move my effective tax rate to 15%, and inflation to a more likely 3%.
Personal Capital also isn’t currently taking into account my income from my rentals, so I’ll click “New Income Event” and select the income type from the list of choices. Here you can add a variety of possible income types like Annuities, Inheritance, Pensions, Rentals, and more.
On the Rental Income popup, you can input the annual amount, the frequency, and when the income will start. My plan calls for me to have acquired enough rentals to produce $3,000 per month in cash flow by age 40, so I’ll input $36,000 per year, starting at age 40. This isn’t exactly correct, since I’ll be buying property from now until then, and receiving income, but we’ll ignore that for now and assume that this is one place where my calculation will be too conservative.
Another thing I wish the planning tool had was the ability to set a percentage increase on rents. My rents will rise at approximately 2% per year, and there’s no way to indicate that here.
OK, with all of that information added, let’s see how our retirement plan is going!
Oof. Still pretty bad. Don’t give up on me now, though! If you look at the monthly retirement spending ability, it’s actually not too far off my goal. Let’s try changing the retirement age to 41 instead of 40 under “Retirement Spending.”
Wow! What a difference! Not only is this portfolio successful in 69% of cases, but the median portfolio value at age 93 is higher than it was at retirement!
There’s just one problem, though. I don’t want to retire at 41. I want to retire at 40. What else can we control that might make the plan successful? Let’s try a monthly spending of $4,500 and a retirement age of 40.
Now we’re talking! Not only can I retire at 40 under this plan, but it actually has a higher chance of success.
Some readers might question my confidence in a 71% success rate, but I don’t actually believe that amount to be accurate. Sure, it’s accurate within the variables considered by the tool, but it misses a few things that I’ll cover in my list of Cons. Let’s review the experience with the tool.
- Cannot set a fixed annual return, only rely on the calculated average return based on your current portfolio.
- Cannot set rents to rise over time.
- Cannot adjust values in steps lower than $5,000.
- Extremely friendly to use.
- Data is presented in a comprehensible, attractive format.
- Runs 5,000 simulations and presents bottom 10% and median results.
- Allows setup of numerous income types, including pensions, annuities, and others.
- Imports your current financial situation based on linked accounts, which is convenient.
Should you use the Personal Capital Retirement Planner? Yes! Just realize the limitations of the tool, and recognize where it paints too rosy or too pessimistic a picture. Remember that the greatest tool at the disposal of an early retiree is flexibility. Just because you have a retirement budget that allows for a certain level of spending doesn’t mean you have to hit it! If you can spend a little less here and there, your ability to weather tough years will be vastly improved.
The Personal Capital retirement planning tool is a pretty neat way to visualize your early retirement, check the odds of success, and tweak the numbers to see where some flexibility might hasten your retirement.
Another tool which you might consider playing with is cFIREsim. It’s a tool which is infinitely flexible, but lacks some of the user friendliness of the Personal Capital tool. Personally, I use both.
How do you test retirement plans? Am I being too much of an optimist? Too much of a pessimist? Too much of a big spender? Let me know in the comments!
My Integrity Policy states that I will note all possible financial interests at both the beginning and end of posts where they occur. Again, if you sign up with Personal Capital from the links on this page, link investment accounts, and are a potential customer for their advisory fees, I am paid a referral for the lead. You are free to decline those services and continue to use the free expense tracking and retirement planning tools.