Have you ever used a Monte Carlo analysis to help you plan retirement? If so, the results can seem scary. You may be looking for a 100% likelihood of success so that you can rest easy–after all, you are probably hoping for a 100% successful retirement.

However, in this episode of Retirement Starts Today, you’ll learn why a 100% success rate should not be your goal. Listen in to hear why.

Outline of This Episode

  • [1:42] Retirement plan uncertainties
  • [8:00] Don’t shoot for 100% success with a Monte Carlo analysis
  • [10:25] How to figure out the cost basis

There is a lot of uncertainty in retirement

It is human nature to want to be certain about your future. However, uncertainty is in the nature of retirement planning. With so many unknown variables, planning for retirement it can be challenging to ensure a successful retirement. This is why people often choose to run their numbers through Monte Carlo simulations. With those inputs, the programs run the probability of the likelihood of success.

Some advisors use fear to sell more products

This week’s retirement headline, Monte Carlo Failures Aren’t Plane Crashes, comes from ThinkAdvisor.com. In the article, author David Blanchett describes suggestions to combat disastrous analogies often used by unscrupulous financial advisors when discussing Monte Carlo projections. These advisors often peddle fear so that they can sell more insurance products.

To capitalize on people’s desires for positive outcomes, many financial salespeople highlight the precariousness of Monte Carlo scenarios by likening them to devastating events. They may use comparisons to plane crashes or a surgeon’s success rate even though these events are not analogous.

Retirement isn’t binary. It isn’t a pass/fail system. The problem is that these retirement doomsayers ignore the magnitude of failure. If you only fall short by $1 in your final year of life, the computer program would list this as a failure in the same way that defaulting by $100,000 would be seen as a failure.

Why a 100% success rate shouldn’t be your Monte Carlo goal

Monte Carlo analyses are suitable for projecting outcomes to understand the big picture, but when it comes to living out the details of retirement, retirees can adjust their plans accordingly. Knowing this can help retirement planners realize that shooting for a 100% success rate shouldn’t be the goal.

A 100% success rate will simply have you working longer, spending less, and conservatively changing your asset allocation. This doesn’t need to be the case. If you shoot for a 75% chance of success then that means that 25% of the time you may need to plan for an adjustment. This scenario will allow for more spending, more memories, more flexibility, and a better retirement.

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