Is a 50% Probability of Success Good Enough? Ep #181 

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By Benjamin Brandt CFP®, RICP® and Benjamin Brandt CFP®. Discovered by Player FM and our community — copyright is owned by the publisher, not Player FM, and audio is streamed directly from their servers. Hit the Subscribe button to track updates in Player FM, or paste the feed URL into other podcast apps.

Have you heard of the Monte Carlo retirement projection analysis? It is being used more and more by advisors and even popular retirement planning websites. Today, in the Retirement Headlines segment, I offer some insight on an article from Kitces.com that argues that using the Monte Carlo projection, a 50%probability of success rate is good enough. Then in the listener questions segment, I answer the question: what should you do if you plan on never retiring? Don’t miss out on my 5 step plan for those that plan on never retiring.

Outline of This Episode
  • [1:32] A 50% probability of success is actually a viable Monte Carlo retirement projection
  • [7:34] Your retirement plan doesn’t have to be carved in stone
  • [11:11] What should you do if you plan on never retiring?
  • [16:00] Steps to follow if you don’t plan to retire
What is the Monte Carlo analysis?

The Monte Carlo analysis is increasingly becoming the most common method of conducting retirement projections for clients. I use it in my own practice and many online retirement calculators such as Vanguard and Fidelity use it too. This risk management technique was actually developed by an atomic nuclear scientist in 1940 to analyze the impact of risks of a project and had nothing to do with retirement.

Would you be comfortable with a probability of success under 70% for your retirement?

You may hear financial advisors discussing a client’s probability of success to describe their retirement portfolio. Reflecting on your grades in school, you probably aren’t comfortable with anything less than 70% since anything below that would be a failing grade. However, in his article, Derek Tharp argues that a probability of under 70% is still realistic for clients who are willing to make some spending adjustments.

Your retirement plan doesn’t have to be carved in stone

Your retirement isn’t static, it’s a constantly changing dynamic picture that should use a dynamic strategy that fits your unique situation and shifting goals. If you are willing to make the needed adjustments on your path to retirement, then when you hear the news that you have a 50% (or even lower) probability of success, don’t panic, you may actually be in better shape than you may realize as long as adjustments are made.

The drawbacks of retirement models

The Monte Carlo simulation is a useful planning tool but it has its drawbacks. Like many retirement tools, it doesn’t do a great job of modeling human behavior in retirement. If the markets start dropping most people adjust their spending habits accordingly. Guyton’s Guardrails are a better tool for predicting how people might behave as the markets rise and fall. You can learn more about Guyton’s Guardrails in episodes 153, 149, and 93. Stick around until the end of this episode to hear my 5 step plan for those that never plan to retire.

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292 episodes