Not really. No one knows how long they can live. So instead my calculations find the corpus required for generating annuity forever (technically as long as the person lives). This has 2 advantages – (1) No need to assume the life span (2) the principle is left behind for people inheriting it.

Another option is to find corpus needed to generate annuity for say 20 years (or 40 years). In this case, we would need the life expectancy.

PS: I have corrected the descriptions.

@Mathias: Agree. Goal seek is good at finding solutions for linear and simpler equations. The more complicated it gets, one should either use solver or go for simulations. As you can guess, goal seek uses some kind of brute force to crack the formula.

Solver on the other hand uses more sophisticated operations research principles like maxima, minima, derivatives, boundaries (most OR problems have solutions at the boundaries alone). But modeling a problem in Solver is much more difficult. Goal seek comes handy in those cases.

Your post highlights some of the problems of this brute force approach.

@Aires: Very cool tip.. thanks

Great tutorial on retirement planning (its always great to teach people how and why can they save money), and with a such powerful yet simple tool as Goal Seek (the poor cousin of Solver, as someone greatly mentioned above).

Just a small tip on using Goal Seek, that often helps me: in your example, you want to make one cell (Annuity Generated) to be equal to another (Corpus needed). A simpler way other than typing the number on the Goal Seek text box is to create a new cell with the difference between both cells (C12-C16, in the example workbook). Then you just need to Goal Seek this cell to zero, changing the blue colored cell (it’s easier than inputing the number manually).

Best regards, Aires

That being said, I also want to warn people that they should take the results of Goal Seek with a large grain of salt. Inspired by your example, I just wrote a post illustrating how Goal Seek can fail miserably in certain cases:

http://www.clear-lines.com/blog/post/Excel-Goal-Seek-Caution!.aspx

Mathias

Thanks for this nice excel sheet.

What I don’t understand is that there is no parameter for how long that I expect to live. In my mind this is a parameter relevant for the calculation.

Regards, Tom

PS. The box with the goal seek instructions contain cell references that are off by 1. For example “3. Set C15 as the cell to set”
This should be C16 right?

@Myron: I am not sure if you have implemented this correctly. Why dont you download the example workbook and let me know if it still throws wrong values…

@bon: I use camtasia studio. They have trial version on their website. Give it a try, it is a fine piece of software…