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Rekenthaler Report

When Vanguard's Retirement Income Calculator Stopped Making Sense

How to break an investment tool--but gain insights from it, anyway.

Try Harder!
The president of the American Finance Association, Dr. David Hirshleifer, noticed something peculiar about Vanguard's Retirement Income Calculator. By its reckoning, a hypothetical 55-year-old investor who saved at the tool's highest possible rate, earning the highest possible return, holding the highest possible current retirement assets, and willing to settle for the lowest possible income-replacement rate … would fail. Her projected monthly income would fall short of the projected goal.

I doubted that Vanguard had botched the math. The second-order calculations for retirement-income forecasts can be tricky--for example, if and how to model portfolio volatility--but the basics are straightforward. The investor owns this much money, is saving at that rate, and therefore will possess the following estimated amount on his 65th birthday. Annuitize that total and divide by 12 to make the payments monthly. It's a spreadsheet exercise.