As part of their modelling efforts, is anyone using Pralana to model a recession? (Especially for SORR modeling). I can think of two different ways to do this, but want to verify with the community that I'm thinking about this properly:
1) Use one of my scenarios to model an upcoming two year period where the stock rate of return is (for example), -12%.
or,
2) Simply use Pralana's historical sequence analysis and pick a particularly bad year, for example, 1965 or 1973. Is this a good way to model the effects of a recession on my plan?
I think you're thinking about this properly. You could also use sensitivity analysis, but that would lower the returns for the whole plan rather than just the first few years like you want. So scenarios together with a period of low returns at the beginning would best accomplish your goal. If you were going to look at historical returns, you'd want a year like 1928 or 2000 to reflect the biggest recessions. One lesson from historical analysis is that having a recession isn't necessarily the worst that can happen to ruin your overall retirement; it's a long period of high inflation at the beginning.
