Toronto-based engineer Ross Grant reached financial independence in his early 40s based on a simple and disciplined strategy of saving, investing and building a nest egg during his working career. His engineering background helped — he credits his success to meticulous planning using Excel spreadsheets, tracking his plan and revising and adjusting it over time.

Based on his experience, he has built a “What IF” Retirement Planner, which is essentially an Excel-based model for planning your retirement that sells for $19.95 (comes with a 30-day satisfaction guarantee) through the firstmillion4you website. On reading Mr. Grant’s story and learning about the planner in the March/April 2009 issue of Canadian Money Saver (you can read the article here), a reader asked me to test drive the product and write a review of it. In turn, I contacted Mr. Grant and he was kind enough to send me his Money Saver article and a copy of the Canadian version of the Planner.

The Planner is relatively straightforward to use: you key in data such as the inflation rate, the rate of return on investments, your age, when you would like to retire, your expected expenses in retirement, your current savings and future additions etc. Entering the initial information gives you an immediate estimate of how your nest egg will look like in future years. You can then refine your estimate by adding other income sources such as pensions, CPP and OAS benefits, rental income or part-time employment.

The results produced by any model are only as good as the input data: you need accurate estimates of spending in retirement and future savings to get an approximately correct estimate. You also need to have realistic expectations of future returns. For instance, if I assume a 6% return (and 2% inflation) for our own retirements, we need to keep saving. Instead, if I assume an 8% return, we could retire at age 55 without saving a penny from now on. To further complicate matters, the results are path-dependent because as you know, markets do not provide smooth average returns — they vary wildly from one year to the next and the sequence of returns has a significant influence on the end result.

Personally, I’ve done my rough retirement planning scenarios through a similar tool that comes bundled with Microsoft Money and I didn’t get that much extra value out of this planner. But if you’ve never done retirement planning or don’t have a copy of Microsoft Money, you will find this tool to be very helpful in a valuable exercise — taking the first steps to plan out your retirement.

[Note: I should point out that I have no financial interest in writing this post. I also thank reader Colin for the post idea and would love to hear any tips or post ideas you may have.

Update from Mr. Grant: “Also, from my experience I would recommend that you should not limit to a one-time exercise vs an ongoing process to get the real value out of planning and level setting to reality”.]

This article has 15 comments

  1. I have been meaning to take a look at the planner for a while, but I do not think the planner is different than many other tools already available to investor`s.
    And if you have an Adivor they have somewhat more sophisticated tools and can do a little more detailed analysis.

    • Canadian Capitalist

      @Ray: Can you be more specific? Which other tools are already available for investors? I don’t think I’ve seen any other than the Planner that comes with Microsoft Money. It’s true that advisors may use more sophisticated Monte Carlo simulations but personally I think it is better to make reasonably conservative return expectations.

      @DGI: True. It is amazing how many strategies that work on paper don’t work anymore as soon as you implement it.

  2. @Ray. Just like CC said in this post, the results are only as good as your input data. For example, if you assumed that you can consistently achieve an 8% return (and actually get it) then chances are that everybody can retire early.

    I usually like to give myself a chuckle and enter -40% annual return, like what we achieved during last year’s market meltdown to see what that does to the numbers. I think if every year in the future was like 2008, I can retire when I’m somewhere around 2500 yrs old.

  3. One thing I agree on is that one has to constantly be ahead of the curve by adapting his/her own strategy to new information. It’s great to have a strategy that is backtested with nice and clean historical data, but once you start investing on future data, that’s where issues begin accumulating 🙂

  4. You can build a somewhat more sophisticated probabalistic tool yourself (this will answer PhilS’ concern) based on Monte Carlo simulation if you read Chapter 2 in Financial Modeling with Crystal Ball and Excel By John Martin Charnes. To run the tool you will need Crystal Ball (you can download a free trial version which has no restrictions). You can take a look at Chapter 2 at the following link: http://books.google.ca/books?id=dkuI6rkkBG0C&printsec=frontcover&dq=Financial+Modeling+with+Crystal+Ball+and+Excel#PPA11,M1

    I also recommend reading a following article on retirement savings and planning from Ibbotson (results based on Monte Carlso model of their own):

    http://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/NationalSavingsGuidelines.pdf

  5. There is a continuation of the retirement model with more complicated assumptions on probability of survival to a certain age which is on page 135 of the Financial Modeling with Crystal Ball and Excel book I mentioned in my previous post:

    http://books.google.ca/books?id=dkuI6rkkBG0C&printsec=frontcover&dq=Financial+Modeling+with+Crystal+Ball+and+Excel#PPA135,M1

    • Canadian Capitalist

      @Basil2: Thanks for the reading material. I’ll check them out. I’m curious if you have built a probabilistic tool and tried some Monte Carlo simulations yourself.

      @Fred: I’ll see if I can get a review copy of RRIFmetic. Thanks for the tip!

  6. Has anyone used RRIFmetic and, if so, were you impressed?

    http://www.fimetrics.com/rmpers.shtml

    • Canadian Capitalist

      @Fred: Actually, they have a fully-functional software that can be downloaded for demo purposes. I’ll try it out and post my thoughts.

  7. This may be too simplistic for this group but I am using good ol government Canadian Retirement Income Calculator at: http://www1.servicecanada.gc.ca/eng/isp/common/cricinfo.shtml

  8. CC, I replicated/verified what was in the book using Crystal Ball without actually customizing to my situation. Basic idea about MC is simple and easy to understand. What you actually do is you build a deterministic spreadsheet and then use a CB to inject a probability distribution to some inputs. What CB does is it reruns your Excel spreadsheet thousounds of times by varying inputs and evaluating all formulas. It is quite fast. For example 10,000 runs will take a few seconds for most spreadsheets I played with. Output from CB is a probability distribution for one or more output formulas in your spreadsheet created on all 10,000 scenarios.

  9. OK…. I am the author of RRIFmetic and I’d like pre-answer a few things. First of all, don’t be put off by the name. It has nothing to do with RRIFs… it is a full functioned cash flow (pre-and post retirement) planner.

    I just liked the name (rhymes with ‘arithmetic’) and stuck with it.

    Also… the program is used mainly by professional planners… the personal version is identical in every way except it limits the user to tracking just 5 subjects/clients.

    Its main emphasis is income tax accuracy which is mostly avoided by commercial software. It is a severe math problem (computing tax in reverse) which simply cannot be solved using a spreadsheet.

    Finally… it is inclusive. In other words it includes all other financial entities in addition to your investments… loans, cpp, oas, salary, lump sums, cash calls… as well the individual investment entities (rrsps, rrifs, lifs, tfsas, roc, resps), and differentiates the way income tax interacts with each over time.

    It is “needs-based”. In other words, it computes in reverse… i.e. the user specifies the net income requirement, and the program schedules investment cash flows (in-out-between) the reg and non-reg savings entities in order to solve for the net income.

    It is very fast to source the data, and solves (converges) in under 3 seconds.

    …whew.

    • Canadian Capitalist

      @steve: I’ve head of RRIFmetic before but I’ve been under the impression that it had something to do with RRIFs as well! It sounds intriguing, so I’m going to try it out. Does the demo download come with a full set of features that I can test out for a review? If it doesn’t would you be willing to supply me with a review copy?

  10. Yes, the demo is fully functioned. It is just time-crippled… you get 60 days to play with it. Also, financial planners can buy the personal version and then upgrade to the pro version for the differential cost.

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