Vanguard Advisors

[Canoeboy]

VG Financial Engines Annuitization

Have used Financial Engine tool on VG site for past few years and have compared results to more complex analyses run by my fee-only CFP. Give them a plus in that details on most of the assumptions made are available. If you dig you can even find a Monte Carlo simulation, but it only predicts up to retirement date. While it tracks my VG 401k accounts, I have to manually update non-VG accounts. Overall, think VG tool is a little bit too optimistic. Main reason IMO is that for purposes of the simulation they convert your funds to an annuity at retirement using historic long-term rates. That said, all the tools I'm using (including as of yesterday FireCalc) point to the same general outcome - I'm at a good place (>95% success) to RE in the next few years.

I don't think you are correct about them using annuities to project results.
This from their site:

Investment Analysis Methods: Any forecasts presented are not a guarantee of future results, but only reasonable estimates. Forecasts are based upon information about you and your current accounts and investments that we know about, estimated annual savings amount and forward-looking models of the economy and securities markets that utilize data such as historical returns, historical correlations, expected growth rates, and calculated risk premiums. Since past performance is not an accurate predictor of the future and reliance on historical and current data necessarily involves inherent limitations, you must understand that the estimates are only a tool to be used in evaluating your retirement portfolio. Forecast amounts are in today's dollars, which means that they have been adjusted for inflation.

Forecasts are created by generating thousands of hypothetical future economic scenarios to evaluate how an investment portfolio might perform under a variety of circumstances, including changing interest rates, inflation, and market conditions.

...and

About Your Retirement Forecasts:

To show your forecasts, we take the 5th, 50th, and 95th percentiles of thousands of hypothetical future economic scenarios. There is a 50% chance that you will have at least the "average market performance" forecast. There is a 5 % chance that you will have the "poor market performance" forecast or less, and a 5% chance that you will have the "excellent market performance" forecast or more. Charts or graphs may not be drawn to scale.

Unless otherwise specified, the forecasts assume your current retirement decisions. If a forecast specifies that it is for your new plan, it assumes that you implement all your new retirement decisions as shown on your "Review Plan."
Forecasting Risk Over Time: If you hold a fund whose investment objective includes reducing risk over time (typically referred to as "target date funds"), we model its declining risk according to its stated timeframe. For other investments, we assume you maintain a constant investment mix through time; it may be appropriate for you to reduce your investment risk as you approach retirement, but the service cannot predict your future decisions and therefore assumes a constant mix of those investments. In general, if you hold any investments that cannot be reallocated by you, we model those investments on a "buy and hold" basis, rather than assuming that you will adjust their proportions over time.




donheff, don't know why you're having those problems; for me they import everything from VG per registration. And my profile shows us married & our respective ages. I guess I set up the profile some time ago, & they save/update it.


I too am a bit skeptical about the income/withdrawal rate, also about 6%. Think we'll stick with the current 1.2%, or less when we start SS in a year or so.

Possible that we are looking at different Financial Engines provided by VG. Cut & Paste from the Financial Engine website that I get when accessing though VG retirement site:

To estimate your annual retirement income, we first estimate the future value of all your retirement-related income sources, including pensions, Social Security benefits and the value of all the investments you'll probably have when you retire. Then, we use a process called annuitization to translate that lump sum into an annual income designed to last as long as you live.

When one clicks on the annuitization link you get:

Annuitization

Exchanging your portfolio
What's an annuity?
A quick example

Exchanging your portfolio for an annuity
Because you want to live off your portfolio's earnings, we translate your portfolio from a lump sum into an annual retirement income. To do this, we estimate a yearly income for your portfolio as if we had exchanged the entire portfolio for an annuity. Note: We don't necessarily recommend that you exchange your entire portfolio for an annuity. This is just the technique we use to estimate your retirement income.

What's an annuity?
A fixed annuity is an investment contract where you pay an insurance company a sum of money and they promise to pay you a specific amount for the rest of your life. An age-certain fixed annuity is one where you pay an insurance company a sum of money and they promise to continue payments until a certain age or for the rest of your life ... whichever is longer. This type of annuity tends to be the most popular form of annuity that individuals purchase. We use this type of annuity (that would pay at least until you reach age 85) to estimate the retirement income that you could get from sources such as your sponsored accounts, IRAs, and lump-sum pensions.

By looking at what might happen if you exchanged your whole portfolio for an annuity, we get an estimate of the annual income you might receive before taxes and adjusted for inflation. If you are married, our estimate of retirement income is based on a 50% joint and survivor annuity. This assumes that if you pass away before your spouse, your spouse will receive half the annual retirement income that you would have otherwise received.

A quick example
Assume that the total value of your portfolio at the end of one economic scenario is $300,000. We simulate buying an age-certain annuity that may pay you $15,000 a year in retirement. If you also expect Social Security at $15,000 a year, we add that to the $15,000 from the annuity to reach a total estimated annual retirement income of $30,000 a year for that scenario. Remember: annual amounts are stated in today's dollars, which means they are adjusted for inflation.

In addition, the Monte Carlo simulation, also found under "How we create your forecast", ends at the retirement age rather than going out into retirement.