Originally Posted by G-Man
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.
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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.