161: What You Need To Know About Retirement Calculators

How retirement planning and retirement spending calculators work and what are some of their flaws. Why figuring out how much money you will have when you retire and how long it will last is a lot like the work hydrologists do to figure out whether Phoenix or Los Angeles will run out of water.

In this episode you’ll learn:

• How aquifers, aqueducts, rivers and springs are like retirement assets.
• What is water banking.
• What is the difference between retirement planning and retirement spending calculators.
• What do retirement planner calculators do and how do they work.
• What do retirement spending calculators do and how do they work.

Show Notes

Saudi Arabia Satellite Photo – NASA

Where the Water Goes: Life and Death Along the Colorado River – David Owen

Vanguard Retirement Calculators

Fidelity Retirement Calculator

Portfolio Visualizer Monte Carlo Simulation

Sponsors

Wunder Capital

Aspiration

Summary Article

How Estimating Your Retirement Is Like Being A Hydrologist

I have always been fascinated by oases. These isolated pockets of vegetation found in the desert are usually nourished by a spring fed via an underground aquifer.

Fossil Water

In extremely arid climates, the prehistoric water stored in the aquifers that feed the springs and sustain the oases is known as fossil water as it is an inheritance from millennia past when there were higher amounts of annual rainfall that sunk deep into the earth to be stored as groundwater.

An ancient oasis is Tayma, a city in northwestern Saudi Arabia that has been inhabited for thousands of years. It was first mentioned in Assyrian inscriptions from 800 BC. It is also mentioned in the Old Testament and was a Jewish settlement for a period of time.

Growing Wheat

In the early 1980s, the Saudi government began encouraging the production of wheat and barley through subsidies and other means.

Farmers in Tabuk province where Tayma is located took advantage of these subsidies to significantly increase their crop production. Satellite photos in 1986 show the landscape of Tabuk province as desert brown. But photos today show areas with large patches of green circles where center-pivot irrigation systems tap deep wells, allowing “the desert to bloom as a rose.”

From 1973 to 1992, the irrigated surface area for crops in Saudi Arabia increased 421%, propelling Saudi Arabia from being a wheat importer to the world’s six largest wheat exporter.

The aquifer source in Saudi Arabia that sustained this agriculture boom was estimated to have as much water as Lake Erie, but it is also primarily made up of fossil water.

By the 1990s, Saudi Arabian farmers were pumping five trillion gallons of water a year, which at that rate would drain Lake Erie in 25 years.

As the farmers pumped, the water table fell and ancient springs and wells like those that fed the Tayma oasis began to dry up.

In 2007, the Saudi government, realizing they were expending a precious ancient water resource and sending the wheat bounty outside of the country, announced they would phase out domestic wheat production, which ended last year.

Instead farmers in the region have been encouraged to pursue more sustainable agriculture using drip irrigation to grow fruits and vegetables.

Saudi Arabia’s aquifer is not being replenished due to annual rainfall totals of less than five inches. Hydrologist estimate the aquifer could be depleted in 50 years.

Making Hay

With domestic agriculture in Saudi Arabian constrained, Saudi companies are increasing their agriculture investments outside of the country in order to secure a sufficient food supply.

For example, Almarai, Saudi Arabia’s largest dairy, recently bought a 15 square miles of land and planted thousands of acres of alfalfa to feed the company’s dairy cows.

And where did Almarai buy such verdant farm ground? In the desert outside Phoenix where the company is using center-pivot irrigation systems to tap an aquifer. It turns out the desert is a great place to grow hay due to the long growing season as long as there is a water source.

The area in Arizona where Almarai is farming has minimal restrictions when it comes to tapping groundwater for crops.

Groundwater is unique in that it can be stored indefinitely. Only when it is tapped for irrigation or domestic uses and not replenished does it run out.

Water Banking

Much of Arizona including the cities of Phoenix and Tucson get a large percentage of their water from the Colorado River via the Central Arizona Project, the largest aqueduct system ever built, consisting of pumps that lift the water 3000 feet, 15 miles of tunnels and 300 miles of open canal.

Arizona is not able to use all of the water it is allotted from the Colorado River so it sends the “excess” water through the aqueduct system and floods “spreading basins” in the desert. The water seeps into the aquifer to be stored in a process known as water banking.

Water Is Like Money

Grady Gammage, Jr., former president of the Central Arizona Project’s board of trustees relates in David Owen’s book, “Where The Water Goes: Life and Death Along the Colorado River,” that “When I talk to lay groups about water, people always ask, ‘Do we have enough? Are we going to run out?’ And I always say that is equivalent to asking whether you have enough money. Because the answer depends on what assumptions you make and how much risk you are willing to take.

He compares fossil water or prehistoric groundwater to an inheritance that can be preserved for the next generation or spent. Groundwater that is replenished directly with water banking or indirectly via flood irrigation is like retirement accounts. And surface water that starts with mountain snowpack and flows through rivers, streams and aqueduct systems is cash flow.

Of that cash flow like water Gammage asks, “Do you want to use it to have a swimming pool? To support lush landscaping in the desert? To grow crops—many of which are exported?” Such as what Saudi Arabia is doing in Arizona. “Or do you want to manage your usage more carefully, and dial everything back?”

Like money, water can be stored or it can be invested. Water stores can be evaluated by hydrologists using complex calculations to estimate how long it will last.

While the amount of water in the ground can be estimated fairly accurately, the biggest wildcard in determining the persistence of water levels is how much rain and snow will fall in the years ahead.

Each of us can do a similar analysis when it comes to our retirement using online calculators to determine how much we will have for retirement and how long it will last.

The current size of our portfolio and the amount we are saving is a straightforward calculation, but like the unpredictability of future precipitation, the biggest wildcard when it comes to our future retirement balance is what will investment returns be in the decades ahead.

Consequently, we are better to use more conservative return assumptions like 6% for stocks and 3% for bonds instead of relying on historical return assumptions which have been higher thanks to falling interest rates and increasing stock valuations.

Related Episode

13: Are You Saving Enough To Retire Early?