Just curious what others are thinking. What do you think is a reasonable success rate after running Monte Carlo simulations, using the last year of your life expectancy? I am not sure if I am comfortable with a 82% success rate. What percent do you consider too risky?
For Historical simulations, is 80% too risky?
Like pretty much everything else about this process...no one else can really tell you.
It depends on your risk tolerance, age, willingness to make adjustments down the road and how certain you are with the inputs to your plan. From reading different forums, I've seen plenty of people that are very comfortable with 80%. If you're using PRC at this stage, then it's not like you are going to run the ship into the ground. If you see that things are not going according to plan, then you should make adjustments along the way. I'd argue that most people that don't have any room for adjustment (downsizing, spending less, getting a part time job, reverse mortgage) are not planning their retirement in advance anyway.
With that said, I'm pretty conservative and my target is 90%. I've put A LOT of work into getting comfortable with my expenses and I'd be willing to get a small job down the road if I started drifting away from the plan.
Ted
@patton525 There is a lot to unpack to answer your question 😮. There is a whole thread on Monte Carlo vs Historical simulations on this forum. I personally don't put much faith in Monte Carlo simulations as you'll see if you read that thread. An 80% success rate with Historical simulations would make me nervous. The first thing I would do is see how sensitive your inputs are. If you increase general inflation by say 1% and drop your rate of return on stocks by say 1%, and your success rates plummets, you have a problem. If changing a few parameters by a relatively small amount results in big drops in success rates, I would be worried. I would look at the tabular results to see if those numbers change a lot as well.
When you say 82%, is that for essential and discretionary expenses or just essential? Do you have secure income from SS, pensions, and annuities to cover your essential expenses? If your 82% represents all expenses and you have enough secure income to cover essential expenses, then 82% may be just fine. As others have said, you can adjust year by year. If your 82% represents essential expenses only and you do not have enough secure income to cover the essentials, I would be exploring single premium annuities (I know they seem to get some bad press here), possibility of a reverse mortgage and/or part time work. Also, I agree that doing some sensitivity analysis might be beneficial.
Back in the "old" days of PRC (when we only had one success probability score) I always shot for 90% as a minimum. Nowadays, we have two success probabilities - one for essential/non-discretionary expenses and one for overall (i.e. including "fun money" and optional stuff). So my new standard is 100% essential, 85% overall. To put faith in this, you *must* do a good job of breaking out your essential and non-essential expenses. I see too many clients that are just winging it/fudging it by putting in a big lump sum for phased expenses.
Take some time on a rainy/boring day to break out the last three months of your statements and receipts (even online) to see where your money is going. That's your "today" budget. From there, it's easy to modify for your go-go retirement years, slow-go, and no-go. Use simple apps like Mint and Simplifi - they'll do most of the work for you (you only need to break out trips to Walmart, Costco, etc for the categories spent).
If you're updating your plan annually, which you should, you can take note of the trending and adjust as necessary to stay out of trouble.
@patton525 I've been ruminating ☕ (that's a coffee cup emoji) over your 80% success rate question and I am walking back a little on me saying a historical success rate below 80% would make me nervous. Simulations, especially Monte Carlo, don't do well with tails, tails being the 90% and 10% percentile, but get better at their predictions going toward the 50% percentile. This means that changing your PRC inputs a little can have big changes in the tail percentiles. So a question for you, compare the end of life 50% percentile dollar amount for each of the Monte Carlo and Historical simulations and then compare those to the Tabular Projection Total Savings dollar amount at end of life. Are they close to each other?? If they are not, what does that mean, heck if I know 😕but it certainly rises questions, no?? 🧐
I think one way to be less worried about the success rates in the simulations is to realize, which I know forum members know well, is that the simulations assume you don't change anything doing the simulation time frame. Using a time sequestered or bucket approach can also reduce concerns. As outlined in previous posts in various threads, if you have two years of cash, 3-5 years in bonds (and/or laddered US Treasuries and/or CD's), the rest in stocks, you can weather the 80% or a little less percentile without much fear 😋. Thoughts 🤓??
I have read lots of good suggestions and opinions. Learning a lot. Thanks everyone. Like @backroads4me stated and like all of us know, there a lots of variables that come into play! My situation is unique probably because I retired in 2016. My wife is 13 years younger than me so I am planning for her lifespan after mine. We live off her income and will not touch our retirement funds until she retires at age 65. I do have a full pension and an annuity that both pay until my wife passes. I have a decent retirement balance that I am comfortable with, and it should hopefully grow until she retires. We both have LTC insurance to absorb some future expenses. No debt other than our mortgage and monthly credit card expenses. I have analyzed our expenses over the last 5 years but have not done a good job isolating essential and non-essential expenses. I probably have overstated our healthcare expenses to be conservative in our planning approach. Don't plan on my SS until age 70.
I like to be very aggressive with the investments (98% equities right now!). Why? We can live off my wife's salary and emergency bucket if there is a 3-4 year hiccup with the economy. If there is a job loss, we will need to re-group if that continues over 18 months!
I still don't know the answer, but will play around with the Sensitivity page to see the swings. I may focus more on historical analysis than monte carlo, but think that both are good yardsticks.
Please keep the ideas coming and poke holes in my thinking, as I am learning a wealth of information (no pun intended).
