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Download a pdf copy of this help file here |
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Download a pdf copy of this help file here |
How comfortable are you about your retirement? How much money will you
actually need to safe for retirement and how do you know what you will
receive once you retire? When it comes to retirement, proper planning
is important. Unfortunately, there are many uncertainties associated with
planning for the (long-term) future, including uncertainty about one's
future earnings, the returns on the retirement fund and even legal or
political changes. In this topic, we will go through a simplified example
to show how someone can estimate the distribution of money after a certain
number of years of saving for retirement. Including the uncertainties
about your retirement money into a model like the one below can help you
plan better for the good days to come!
Example
You are a 32 years old citizen of Country X and like to start planning your retirement. The retirement age in X is 60, but there is a 75% chance that it will be changed to 65 years. You contribute 5% of your salary to the retirement fund each year. Your annual salary this year is Ђ 20,000, and you expect it to rise Lognormal(3%,1%) per year in real terms (i.e. over inflation). You estimate that the return on the pension fund will be minimum 3%, most likely 4% and maximum 7% (assuming a Pert-distribution).
How much is your retirement fund worth upon retirement?
The file 
Finally retired provides the example of this problem. As you can see
in the graph below, your total worth at your retirement age has a wide
distribution, with a 90% confidence interval between Ђ 75,000 and Ђ 116,000.
The left and right peaks represent respectively the situation in which
the retirement age stays 60 years and the situation in which it increased
to 65 years.
Of course, many other useful and interesting uncertainties can be added to the model and plenty of additional questions can be asked, but we leave that up to you!
