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Retirement Readiness Using Excel NPV against All Withdrawals
Old 02-01-2023, 11:03 AM   #1
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Retirement Readiness Using Excel NPV against All Withdrawals

I have been watching this lady channel on YouTube lately. The video talks about creating a Retirement Income Plan and assessing your retirement readiness by using the Excel NPV formula against all your withdrawals from your retirement accounts during your retirement lifetime. In the video, they use 4%, 5%, and 6% rate of return. The result is then compared against the present value of your retirement nest egg to determine if your retirement goals are over or under funded. Very interesting methodology.

More detail can be found starting at 33:00 minutes in the video below.

Would love to hear feedback from other on this approach to assess retirement readiness.

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Old 02-01-2023, 05:40 PM   #2
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Any comments?
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Old 02-01-2023, 06:07 PM   #3
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Quote:
Originally Posted by G-Man View Post
I have been watching this lady channel on YouTube lately. The video talks about creating a Retirement Income Plan and assessing your retirement readiness by using the Excel NPV formula against all your withdrawals from your retirement accounts during your retirement lifetime. In the video, they use 4%, 5%, and 6% rate of return. The result is then compared against the present value of your retirement nest egg to determine if your retirement goals are over or under funded. Very interesting methodology.

Would love to hear feedback from other on this approach to assess retirement readiness.
[Removed video links and thumbnails.]

I did not watch the video, but I can infer from your description what she's doing.

I learned about NPV and related functions in business school.

I use NPV to convert my future SS benefit into a current lump sum which then gets added to my FIRE stash which eventually ends up in what I consider my current effective withdrawal rate.

I think her method could result in useful information to a retiree with the following caveats:

1. Choosing a discount rate properly is challenging even for people who know what they're doing. An average retiree probably doesn't have a very good chance of choosing proper discount rates.

2. Choosing a discount rate that is too high or too low can result in wild swings in the output, especially over long periods of time with typical retiree dollar amounts because the error gets compounded.

3. I dislike methodologies that use static rates of return. I much prefer running things through historical analyses.
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Old 02-01-2023, 06:30 PM   #4
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Originally Posted by SecondCor521 View Post
[Removed video links and thumbnails.]

I did not watch the video, but I can infer from your description what she's doing.

I learned about NPV and related functions in business school.

I use NPV to convert my future SS benefit into a current lump sum which then gets added to my FIRE stash which eventually ends up in what I consider my current effective withdrawal rate.

I think her method could result in useful information to a retiree with the following caveats:

1. Choosing a discount rate properly is challenging even for people who know what they're doing. An average retiree probably doesn't have a very good chance of choosing proper discount rates.

2. Choosing a discount rate that is too high or too low can result in wild swings in the output, especially over long periods of time with typical retiree dollar amounts because the error gets compounded.

3. I dislike methodologies that use static rates of return. I much prefer running things through historical analyses.
Thanks for your feedback as always.
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Old 02-01-2023, 08:13 PM   #5
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I didn't view the video but the approach is elementary. If you had the NPV at time zero in an account that earned the discount rate and took out the scheduled withdrawals, after the last withdrawal the account balance would be zero.

Another approach would be to solve for the IRR that equates the NPV to your current retirement portfolio balance, that is the rate of return that you would need to earn for your stash to fund your planned withdrawals.
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Old 02-03-2023, 12:33 PM   #6
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Yep, any discount rate chosen is just a WAG...no way to know if it will reflect future reality,
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Old 02-03-2023, 01:06 PM   #7
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Two things come to mind:

General Helmuth von Moltke the Elder: "No plan survives first contact with the enemy."

The D-Day weather problem: ... a story possibly apocryphal but worthwhile anyway: One day well prior to D-day, the army Met (meteorological) office received a request from SHEAF for a weather forecast on a specific day a couple of months in the future. "Impossible," they said and this was relayed up the chain of command. Back down came the order: "A forecast is required for planning purposes."
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