Recently, this Q & A appeared in a column on the internet.
Q. I’ve been doing some estimates for retirement with the TSP calculator. I plan on leaving my money in G Fund after retirement, and for interest, I’ve been putting 3 percent. Is that a conservative enough amount?
A. The calculator is unrealistic in that:
- It assumes that a constant rate of investment return will be earned each and every year, like clockwork;
- You can predict what this rate will be;
- You know how long you’re going to live;
- Inflation isn’t a factor.
Each of these assumptions is absurd. I think that the calculator is, at best, of little use, and, at worst, dangerous. You’ll find an article I wrote on the subject here.
Any assumption about the future, including investment returns, is uncertain, wouldn’t you agree? But we make these assumptions anyway, don’t we?
I believe that even when a calculated result about future returns uses a constant rate, users are smart enough to know this is arbitrary and “your results may vary.” The same logic applies to the individual rate. We use these uncertain numbers because, despite their “softness,” they are useful in planning.
Example: Mike, a 27 year old employee has, say, $8,321 on deposit in his TSP account. Each pay period $75, including the automatic 1% from his employer, is added. Using these numbers and several possible average rates of return, he wants to know how much might be on hand at the end of 28 years.
Without a software calculator, this would be formidable arithmetic, don’t you think? How many of us could take a look at Mike’s input and make reasonably good estimates of how the numbers would turn out?
Aside from the 100% certain arithmetic for these numbers, there would still be a great deal of uncertainty regarding other pertinent factors.
- What changes will there be in the GS pay system?
- Cost of living changes (aka: inflation) could be much higher, or lower, than they were in the previous 28 years.
- Maybe a more speculative fund will lure him.
- With promotions, Mike might well increase his contributions significantly several times over the years.
- Perhaps his family (and expenses) will grow more than expected, and decreases in contributions will be necessary.
Despite these and other imponderables, Mike plugs in the numbers. His results, for an $8,321 start and 28 years accumulation:
|<<< Average Rate of Return >>>|
Mike considers his output. He prints the data and tries again, using different numbers and printing these results, too. He then puts the printouts in a file folder with other papers concerning his financial future. Despite the impossibility of accurately predicting the future, Mike is glad to have this information. He is especially glad he did not have to use paper, pencil, and hand calculator!