By Eberhard Mayerhofer, Department of Mathematics & Statistics
In Ireland, it is common for individuals to set up personal pension plans to supplement their state pensions. Private pensions are popular, because pension contributions are tax-free to some extent, and so is withdrawal upon retirement. Many advisory firms assist individuals in navigating this private investment landscape, offering guidance supported by pension calculators that provide expected funds based on monthly contributions until retirement.
The mathematical framework underpinning these pension calculators is relatively straightforward, primarily involving the summation of a geometric series to estimate expected fund values and monthly pensions—commonly referred to as pension projections. However, the inclusion of various nuances such as tax-free thresholds adds complexity to these calculations, resulting in the development of often simplistic calculators.
Over the past year, I collaborated with a Limerick-based firm to create a new and purportedly highly flexible pension calculator—dubbed the Pension Projection Calculator by Metis Ireland. Developed in JavaScript, this calculator offers extensive input options, particularly distinguishing between employer and employee contributions. Upon retirement, users can choose between reinvesting in Approved Retirement Funds (ARFs) or receiving annuity payments.
A notable feature of this calculator is the MAX Button, allowing users to maximize tax-free contributions until retirement. Additionally, a risk assessment is provided in the footnotes, utilizing a Monte Carlo Simulation. Those perusing the footnotes will discover the probability of receiving 10% less than the quoted projection. Notably, in many instances, activating the MAX button results in a 100% probability.