Retirement Analytics and Pensions

Overview

One of the primary uses of financial analysis is to analyze retirement finances. In particular, how much money is needed in retirement in order to live comfortably.

Formal Statement

Assume that an individual will work for a given number of years. They will consume a portion of their income and save a portion. Then they retire and will live off their savings. What is the likelihood that they run out of money prior to dying? There are several variables in this analysis that once can change that will change the outcome.

• Number of Working Years
• Savings rate during work
• Consumption rate in retirement

In addition to these variables, there are other variables that may not be under the control of the retiree.

• Salary during Working Years
• Returns earned on savings

A visualization of the retirement problem. Total wealth increases prior to retirement, wealth decreases during retirement.

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Solution Methods

One of the primary method ways to tackle the retirement problem is to split it into two different problems.

• First calculate the amount of money needed starting at day one of retirement
• Calculate how much money you need to save each year of your working life to hit the target amount

Both methods will typically ignore inflation. That is, all forecasts are done on a real basis.