Planning For Retirement?

I had a pretty basic long-term financial calculator for over a decade before I retired.  Building and updating this model helped me stay focused on making smart choices about spending and creating wealth.

I called it retire_soon.xls.  It was so old, you couldn’t have spaces in file names when it was created.  It worked fine as an estimate but wasn’t something I was comfortable basing my quit no-quit decision on.  Though it said quit!

Then my company’s 401k plan introduced a calculator that could tell me whether my finances looked rainy 🙁 or sunny 🙂  It said quit!  But it was like the wizard behind the curtain–I couldn’t control (or even know) what assumptions were being used for inflation, investment returns, social security adjustments etc.  I couldn’t adjust my spending assumptions down as I aged.  I couldn’t vary my investment returns by year–the S&P doesn’t just march along at the same rate each year.

I entered my information into Fidelity and Vanguard’s calculators and had similar concerns about that damn wizard behind the curtain.  I wanted to understand how the calculator worked and I wanted more control–no surprise huh?

There are a bunch of financial calculators out there.  My friend Darrow over at wrote excellent summaries of many of them a couple years ago.

I found Darrow by literally typing Can I Retire Yet? in Google after a particularly difficult day at work and a particularly cold day in my mountain locale.  He was my gateway drug to the whole FIRE (financial independence/retire early) blogosphere.  I’m so thankful for him and his articles continue to be valuable for me.  I refer folks to his articles about long-term care insurance to explain why Mr. Ms. Liz and I don’t have any.  Without him, I wouldn’t be Ms. Liz!  I’d just be Liz . . .

So enter Mr. Ms. Liz (also an Excel/financial geek).  He created a retirement model that had a column for each year, gave me control over the investment returns by year, allowed me to easily change inflation and my spending assumptions, roll some of our home equity into investments as we downsize etc.  And it makes it easy for me to understand the calculations without interviewing a wizard behind a curtain.

But the model is only as good as the assumptions that go into it.  Assumptions for inflation, tax rates, investment returns, social security growth, home equity growth, etc.

So what assumptions should be used?

Any articles I’ve read on this end up riddled with comments about the assumptions being too aggressive.  Dave Ramsey typically uses a 12% investment return in his analyses which seems way too high to me.

I tend to think most about the gap between investment returns and inflation.  But the model changes even if the gap stays the same.  A 12% investment return and 9% inflation results in more taxable income than a 6% investment return and 3% inflation even though the gap is identical.

I’m risk averse so my assumptions are pretty conservative.  I’d much rather be wrong and end up with too much money than not enough.

My gap between investment returns and inflation is (you may have guessed) 3%.  My average investment return is set at 6% and inflation is set at 3%.

Over my lifetime, the average S&P return with dividends reinvested is 9.8% but I keep some money in banks earning not much which lowers my average return.  I also prefer to error on the low side and 6% is conservative.

Over my lifetime, the average inflation was 4.2% but that includes some crazy years when I was in high school and mortgage rates were 20%.  More recently, inflation has been around 2.5%.  3% may be a bit low but I have some control over my expenses so I should be able to keep my spending growth at that level.

My tax rate in the model is 20%.  Keep in mind this isn’t the incremental rate an additional $1 of earnings is taxed on but the total blended rate on all income.  From the start, I get to reduce my income by standard deductions and personal exemptions so much of my income won’t be taxed at all.

I feel a 20% tax rate, if anything, is high.  There are examples of folks making up to $100,000 and paying no tax–check out Jeremy’s articles at for great tax planning strategies.  I expect to pay less than 20% by using some of Jeremy’s strategies. Colorado exempts a significant portion of retirement income from tax so that will help us as well.

Homes tend to increase in value but at a rate that is less than inflation.  I have our homes increasing 2% in my model.  If my inflation rate is too low, this should be too low as well and the two should offset each other.  As we downsize our real estate, the offset between home equity growth and inflation won’t work as well but right now real estate is a significant portion of our net worth.

It’s been shown that people spend less money as they age so I adjust the inflation on my discretionary spending (groceries, dining, clothing etc.) down starting at age 65.  Rather than 3% inflationary growth for these expenses, I grow them by 2.7% at age 65 and 2.4% at age 75.

We each have to adjust our assumptions based on what we expect our old age to look like–remove vehicle expense, add assisted living or long-term care costs etc. I built in worst case scenarios and will hope my old age is more healthy and less costly than my plan.

What tools are you using to keep you on the path and prepare for retirement?  Are my assumptions close to yours?

I’m sharing a version of Mr. Ms. Liz’s long-term financial model–request it in the comments and I’ll send it over!

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Author: Ms. Liz

A CPA, I retired at 51 and I am helping people create their fantastic futures!

20 thoughts on “Planning For Retirement?”

  1. Ms Liz, as you know, I am a spreadsheet geek myself. I’ve been using Mr Ms Liz’s spreadsheet for a week or so, tweaking it to match our lifestyle. Of course I love it because it says, retire! I believe your assumptions concerning inflation, investment growth, etc are valid. But I decided to be a bit more conservative than you! First, I decided on a stock market that goes sideways for the first five or six years of the model. I want to make sure that I am not counting on any short-term gains in my retirement decision. I also decreased the rate of increase on my home. We have lived in difficult times for homeowners and I want my pessimism reflected in the model. So, I used 0.5% for home value increase. Finally, I adjusted the inflation rate to be 3.5%, again trying to maintain conservatism. So, even with all my pessimisms and conservatisms, the models says “retire”! And so you are still invited to our “We Don’t Have to Work Anymore” party.

    1. Hi Jeff,

      It’s super smart to stress your assumptions as I’m sure our future will hold many surprises. I’m looking forward to that “We Don’t Have to Work Anymore” party!

    1. Nice to hear from you Erotica! The model is way more basic than those nasty reserve studies–I’ve sent it on over just to prove it. 🙂

  2. I’m hoping for an average inflation rate of 3%, but prepared for a bit more. However if it gets to 5%p.a. or more, I will start feeling the pain! Hopefully my back stop (UK state pension) will plug some of the gap. After that I hope my ‘not yet exercised’ pension investments will do the business. Failing that I am down to my ISA’s.
    So I have 3 backstops. I just hope that is enough.

    1. Hi Erith! It sounds like you’re well prepared for your retirement with 3 backstops. If you’re like me, you probably also have some ways you can reduce expenses without too much pain. Enjoy your retirement–I love hearing from friends across the pond!

  3. Of course I would like to see it too Ms. Liz. I know I’ve got a ways to go but it’s never too early to get your act together! Maybe I’ll be hiking those trails with you in Arizona sooner then I think!

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