This calculator computes asset allocations, income annuitization,
and consumption using scientific
principles. And it explains how the recommendations were derived.
This calculator does not include a questionnaire on risk tolerance
(your psychological ability to stomach investment losses). Instead it
primarily concerned with computing the appropriate strategy given your risk
aversion (preference for uniform consumption).
Several things set this calculator apart:
A balance sheet approach - asset allocation can't be performed in
isolation, but must be performed by taking into account the presence
and size of Social Security, Pensions, 401(k)'s, and income
annuities. See the FAQ for more
Future contributions - the impact of any possible future
contributions is handled by entering their expected annual amount,
growth rate, and volatility.
A true risk free asset - liability matching bonds, that is
inflation indexed zero coupon bonds with a duration matching that of
anticipated retirement cash flows, not cash, are used as the true risk
free asset. Liability matching bonds might be hard to purchase, but a
TIPS ladder, or a TIPS bond fund of appropriate duration, is a close
Income annuities - income annuities are a valuable tool in the
retirement toolbox. This calculator optionally recommends the
purchase of inflation indexed income annuities, be they single premium
immediate annuities or deferred income annuities.
Admit what we don't know - returns from the stock market are
intrinsically unknown. We generate a range of results for different plausible
Cross validated - sample Merton's method recommendations produced
by this calculator have been
cross validated with a
second asset allocator that uses stochastic dynamic programming.