Decoding The “Chance of Success” In Your Retirement Plan
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- เผยแพร่เมื่อ 2 มิ.ย. 2024
- You enter your income, expenses, investments, and liabilities into your favorite retirement planner. You click a button, the software does some kind of calculation, and out pops a single number.
It may be 87%. Maybe it’s 72%. Or it could be 15%. Whatever the number, you’re told it represents your retirement plan’s “Chance of Success.”
What exactly does that mean? How is it calculated? And what “Chance of Success” should you aim for? We’ll tackle these and other questions in this video.
You'll find my article on this topic as well as links to the tools I use in this video in this article: robberger.com/decoding-the-ch...
Timestamps
0:00 - Chance of Success in Retirement
1:49 - FICalc
4:17 - New Retirement
6:57 - What number should we aim for?
10:14 - Rate of return assumptions
12:36 - Optimistic assumption/Pessimistic assumption
14:14 - Needing every single dime
15:02 - What if we things don’t work out as planned?
15:45 Financial Freedom
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ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
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Here's my article on this topic, along with links to the tools and articles discussed in the video: robberger.com/decoding-the-chance-of-success-in-your-retirement-plan/
Good video as usual. Two comments. One, my practice is to require a very high Monte Carlo number for the New Retirement Must Spend option and permit a much lower number for the Like To Spend option. Two, one must consider that having a high Monte Carlo number means that you have a high likelihood of dying with large savings, thus not enjoying your life as much as you could (see Die With Zero)
Great overview Rob. I was really concerned with my probability of success when I first retired, and it had me frozen in fear. Then I realized I could pivot and remain flexible. Now I have a lot more confidence for the future.
Another great video. Thank you and I think we need to be flexible on our retirement spending based on economic conditions.
No way I wanna be like Thelma and Louise and drive over that cliff! 🚗👼 😂
Very good point.
If you retire and you just barely have enough income to cover your expenses you might be at risk.
I was in that situation 2 years ago when the market dropped.
So in my case I worked another 2 years to
1. Get completely debt free. (lower our expenses)
2. Buy 2 good used cars so no big expense just after we retire.
3. Allow the market to get back to new highs (this way just luck)
I will be retiring in 10 days and I think we are ready.
Welcome to the honeymoon phase of retirement (in 10 days).
I suspect, from listening to others, budgets are wrong virtually 100% of the time. Hopefully close, but always wrong. You can't know until it is done. Many say they spent less than expected.
@@whatsup3270 I've been told the saying in the military is: "No war plan survives intact after first contact with the enemy." And another is from the wise sage of boxing, Mike Tyson: "Everybody's got a plan.... til they get punched in the mouth." 🙂
I think working the 2 additional years to enter retirement debt free and with no large ticket items (cars) in the first 3 years was a sound call! Congrats and best wishes!!
Excellent information. Thank you. I always learn a bit more each time I watch your videos.
Great points. I just set my "must spend" and even with pessimistic assumptions I'm good to my mid 90s . If i really need to survive *50* years of sustained terrible conditions I'll rent rooms in my house to cover my double chocolate caramel truffle budget
Great and timely topic..having the same question for a while
Thanks Rob! You brought up excellent points to consider when evaluating a plan's percentage rate for success. BTW, I had a conversation with my financial advisor yesterday on the same topic. After your video, I have a few follow up questions for my advisor. :-)
Excellent walk through.
You definitely have my sub. This content is next level. For me Eledator was the turning point. Please keep doing what you do and keep being you, love it.
Excellent video! Flexibility is key and if you couple the flexibility with a dynamic withdrawal strategy you can pretty much ensure you will succeed.
Great video, again. Years ago, I started thinking of the "Chance of Success" as my "Chance of having to/getting to modify my plans", since we have that flexibility. I also realize it's a semantic difference but it helps me think about our near / long terms options to make adjustments more comfortably.
Great Video!
I'm curious if there have been any studies with respect to people that retired at least 5 years ago based on Newretirement projections to see how accurate the software predicted things
no, because that would be revealing the wizard behind the curtain.
I love your perspective on this Rob. Primarily we need to understand the assumptions in our projections. This is the primary reason I like to be a DIY planner in addition to having a financial planner. If I just hire out this type of planning and trust the opinions of the planner, then I am not in as good of position to manage the plan as the plan plays out.
Great video!.
My advice is to use the various analysis like Monte Carlo to get an idea of what you need, and then to see how various adjustments and changes lead to different “success” rates.
As you said input leads to output.
I think that many lay people are not that good at math, let alone the concepts of statistics and probability. That is the major weakness of NR if you don’t understand those things well.
The idea of 95% success rates sounds nice, but as you say, is entirely dependent on inputs, not on facts. Also high success rates may leave a lot of money unspent, which can be good or bad.
Then the other big issue is that we assume the past predicts the future, which is useful, but also potentially wrong.
I don’t know if you have ever spoken about other ways to get to a similar point? The one that comes to mind is Wade Pfau’s concept of a Funding Ratio.
I love your videos, but this is the best ever. Very, very few FA's tell you this kind of stuff.
Thank you for your research. I find your videos are well done. RIght now I'm keeping an eye on Eledator
@Rob Berger. I have been using NR+ for several years. I take a different approach. I look at the annual 10 year projections (from Morningstar and Vanguard) for my asset allocation (60/40), then I use that number, say 7.3% as my Average in NR+. To get the Average to = 7.3%, I put in optimistic and pessimistic values with a reasonable variation. When I run the Explorer, I view the "Median" as my result. I update this every year. Note for some of my accounts (Roth IRA for example), I have. a higher return as my Roths have all equities in them. So, I consider not only asset allocation, but location. I rant this by the NR+ folks, and they said this is a reasonable approach.
Rick, do you do this 10 year update every 10 years because you’re confident the 10 year rate of return is more reliable than, for example, the average of the 30 year? I suppose it depends on how old you are. I’m only 40, but I use the 30 year average rate of return on my Vanguard ETFs just to be safe because I thought that was the wiser thing to do. What do you think?
Average for me is 5%
I update every year based upon Vanguard's 10 year outlook (published) annually. I compare Vanguards report to that of Morningstar's. Even though I have an MBD, did CFP courses and more importantly have studies this stuff for years...I relay on the "Collective Competency" of the Vanguard and Morning Star work. I take it out to one decimal (rounded down-not up). I also make scenarios with +- 0.5%. I also check using FI Calc for % success based on historical. If you read lots on this stuff...you will find that Vanguard, Morningstar and others generally project equities to be LOWER that past long term averages. It's all somewhat of an educated guess. IMO, at age 40 you don't need to worry about projected rates...just save more!
@@rickdunn3883 Very good - thank you so much for sharing!
Thank you for explaining this I couldnt understand why NR pessimistic claculation craters everytime meanwhile average and optimistic make everything look doable or very rosy!
There is no set it (retirement plan) and forget it (ignore it) plan that will work. There are no shortcuts and the 4% rule is only a rule of thumb. A good retirement plan needs a good spending (expense) projection based on your anticipated spending needs with inflation adjustments, a projection of your income (SS, Pensions, Annuities and retirement withdrawals), an appropriate asset allocation for your risk tolerance, an appropriate expected return for your assets, a plan for dealing with medical, aging expenses and LTC and a plan for income taxes. Then you need to monitor (spending, investment performance, inflation, etc.) and adjust along the way to make sure that you are on track for your assets to get you through retirement.
I use NR. I am OK with a Chance of Success rate of 90% with Average Assumptions. I would not be OK with a 90% Chance of Success with Optimistic Assumptions. That would bring the success rate using average assumptions down significantly. If I am expecting everything to go very well for the next 30-35 years, Optimistic assumptions, I would want the success rate to be 99%.
The trick with NR though is that your assumption around optimistic and pessimistic growth rates for each account drives everything
@@travis1240 right. I keep all stock funds at 9% optimistic and 5% pessimistic for a 7% average assumption. My living expenses are a bit higher than what I hope reality ends up being. I have hefty living expenses the last 10 years of my hundred year life for high quality Continuing Care living. All of this to pad things a bit. Thanks
@@travis1240exactly. I find it hard to gain confidence if I’m defining optimistic and pessimistic return rates.
Rob - would love to see you do an interview or podcast session with Morgan Housel if at all feasible.
Yes, indeed Morgan is the best!
can you talk about the best way to invest in bonds.. are individual bonds better than bond etfs or does it not really matter?
Any of these bond funds should do the job nicely:
Vanguard Total Bond Market Fund (VBTLX)
Schwab U.S. Aggregate Bond Index Fund (SWAGX)
Fidelity U.S. Bond Index Fund (FXNAX)
Vanguard Total Bond Market ETF (BND)
U.S. Aggregate Bond Index ETF (SCHZ)
For me the solution is dynamic withdrawals. I have a minimum budget, which applies to a bad year.
Exactly, if you get a year where the market crashes, instead of going on your annual international vacation, maybe just do a national park road trip instead.
Rob, First, thank you for all your content; I am learning a lot. Can you suggest an order for all the content that would be beneficial to the beginner investor? Retiring soon. Thank you, Kim.
With all due respect to Rob, I would suggest starting with NR's videos.
How do you know when to adjust spending? There are bound to be some down years in any 30-year sequence, but some of those scary down years might not require spending reductions.
Empower's "Chance of Success" had us at 75-%78 % However E-money has us at 95.9% with $10,000 more for vacation.
Wish a retirement program would ask : What is the cape ratio at time of retirement and adjust returns accordingly, And What is the rate on the 10 yr T Bill in relation to historical averages and adjust the bond return accordingly.
Very helpful. Rob, I would like you to consider investigating using the P/E of the S&P 500 at the time of retirement as a better predictor of allowable annual withdrawls from retirement savings over using Monte Carlo. I heard of this approach in Tresidder's book, How much do I need to retire?
That is an interesting way to look at it. So instead of a 30 year retirement that started in the year X from the past, we have a 30 year retirement started with a P/E ratio from the past. Right? I assume we can make an excel sheet and add a column of P/E ratios and then sort it to see which ones succeeded and which ones failed. Then decide to retire when a P/E ratio is at a certain value
When putting your asset allocation and net worth and spending requirements into the program isn’t that the extent of input? I am confused as to putting in different rates of return as to how that’s done. Once again a great subject and talk,thanks Dan
Hi Rob, I have a question regarding SMA’s recommend from a Fidelity advisor. This SMA has 200 stocks large cap that they manage at .7% fee. What are your thoughts about SMA’s. Thanks.
I am a subscriber and enjoy your channel
Hello. I was wondering if you could please confirm that New Retirement essentially preserves your home equity and does not use it in the cash flow? Does the equity display as an asett on last year if this is correct? I am currently a free user so perhaps a paid subscriber has something different?
Thank you very much. I value your videos greatly!
Do you know of a tool that allows you to plan out spending year by year? For example, in year 4, I'll have 2 kids in college, in year 5, I'll buy a new car, and in year 8 I'll take a trip of a lifetime. I'd like to be able to map it out, instead of assuming average spending year over year.
I actually think that flexibility is too often assumed - whether its talked about enough, I couldn’t say. It certainly is an odd assumption to make when thinking about your average retiree. More than this, it’s on its head. You first work out what you need, and on that basis, calculate whether you probably have enough. Only then, if you probably have more than enough, you theoretically have some flexibility. (Then, if you like, you can make a few more calculations based on additional spending scenarios - beyond what may be ‘enough’.)
Rob, you talk alot about the 4% rule, however there are listeners like myself that are going to be affected by RMDs. It would not be cost effective to covert to a Roth IRA unless a special tax break was given (we had one in the 2010s). I usually use the RMD calculator and put in a modest rate of return to get an ideal of the withdrawals per year. Any suggestions on how to handle this issue or does it matter. Thanks for all you do for us!
wouldn't you jus use the RMD as part of your 4%? Granted after the 3rd year of RMD, it increases more than 4%; however, that doesn't mean you don't reinvest above your 4% need.
I not sure but sounds good. Thanks
I don’t know all the rules for RMDs but if it’s required then just do it and reinvest that money back into your brokerage account or perhaps give to your children to put in their brokerage account. You retire with dignity, and keep that money growing for generational wealth.
Great video! I’m 31 and just started investing. How do you feel about this breakdown for brokerage account:
80% US Stocks (50% of which VTI, 25% SCHD, 25% SCHG)
10% Non US Stocks (VXUS)
10% bonds (VGSH)
Test your allocations in Portfolio Visualizer say versus a 60 / 40 or other.
@@kw7292a 31 yr old seems too young for a 60/40 portfolio, imo. It would be a good idea to check out Portfolio visualizer, I might add more international and test that on PV.
@@noreenn6976I’m 59 and retired. I was 100% IWF and QQQ until I was 50. Now I’m 75% IWF and QQQ, with balance being SPAXX dividend aristocrats.
IMHO, a 31 YO shield be 100% growth, unless you will need to money out for living expenses.
I always kept retirement funds entirely off limits; therefore I could invest more aggressively and not worry about market flux.
Should there be a difference between General Inflation and SS COLA? I use NR, and a lot of people on the FB group use 2% and 5% for General inflation, but 1% and 4% for SS COLA. I think the reasoning is there is generally a lag between General Inflation and how the COLA is set. This can make a huge difference in the success rate and ending balance of a plan. Thank you for your comments.
Thanks for steering me to ficalc - amazing. It's showing 100% success and if I change my allocation to 80% stocks, 20% bonds I am ending up with 50% more than today, on average, if I always withdraw 4%. Incidentally, I am also 100% successful with an 8% withdrawal but I end up with less money than today - so, Dave Ramsey is right.
I’m a little confused how you can have 100% success with an 8% withdraw rate. So if you retired in 1929 you can do 8% withdrawal rate and still last 30 years?
@@TonyCox1351if you have millions (like +20), then you should be fine with this kind of withdrawal.
Rob- you mentioned that the perpetual withdrawal rate is somewhere around 3.5%. At that rate your retirement success rate would be 100%.
Based on historical data, perhaps, but not based on Monte Carlo simulations.
@@rob_berger different portfolios have different perpetual withdrawal rates. I believe there are articles covering the subject. For example, one portfolio in particular(golden butterfly) has a higher perpetual withdrawal rate than most. I believe the success rate is 100% at a 3.5. % withdrawal rate over any 30 year period in a Monte Carlo simulation.
Not in 1929. And there were other years similar, not as sever but similar and the pair. In Bengen's paper he had a neat graph which showed the key was retiring at the bottom of a down market.
I've always been curious ,what amount of money does one need to have to enable his family to never have to work again. One family lives and dies at 90, their 1 child has a family and lives off the same pot...that child has her own child etc...going on for generations. Assuming each generation has just one family to inherit the pot and it grows at a conservative rate for index funds, how big should that original pot be? Another assumption is that their expenditure remains the same, adjusted for inflation.
Interesting question. I am sure that can be calculated, but with crazy variation as you may have two, three, or more generations at once needing to be accounted for. Would they all need separate housing, etc…
I think this may have been something they thought about in England in Jane Austin’s era. In her books, the “estates” were “entailed” to the eldest son. This included the family home, of course, and a sum of money, which was invested and paid out to the heir. They always spoke of how many “pounds a year” the eligible, non-working male suitors have…Apparently England stopped recognizing entailments in 1925.
I was thinking to simplify, each generation is still just one household big. That way the calculation is easier I think
1891?
Too many caveats to make this worth while. What would be more helpful are what are realistic inflation numbers for best and worse case scenarios to use. That way I can get a decent idea of my own potential retirement.
Can you review the value and accuracy of programs that use current value vs future value data. I am having trust issue with those programs that use uninflated data. Am i wrong or is it all just a guess in the end anyway? I have modified my own spreadsheets to use the interest and market rates of return since 1924 and inflated my draw by the inflation rate, except in really down mkts (15% or more). If down more than my chosen rate i dont inflate my draw. It seems to work on paper, now i hope to have 25 or 30 years to see if it works in real life. Too much work, lol.
If you're using the official government inflation rate, you have to account for the fact that it has used different formulas over the years. So, not apples to apples.
Also, the concept of taking a certain percentage yearly makes me scratch my head. Let's say my % draw plus social security gives me 100k. Ok, that's nice, but let's say that this year I need a new 40k roof. Oh, and maybe I need a new car. Seems like this kind of plan requires starting with a big emergency fund and adding some of my draw to it each year to keep it healthy.
NR let’s you input one time expenditures and any point in your retirement to model the impact.
@haldriver1378 yes, understand each year stands alone and certain alterations are always required. Every data set assumes and guesses at virtually all parameters. Not to get geeky but chaos and the butterfly effect makes any plan past 5 years a pure guess despite what all the professional advisers may say.
"Your portfolio doesn't die with you. It goes on. So I am not managing my portfolio for my lifetime - I'm managing it for my heirs, whether it's my daughter or the charities I support." - JL Collins
Wait, do you think cryptocurrency will crash? I don't think so. I'm using Eledator, traders just do business instead of me :) I don't afraid even if crypto will crash
If by the time you retire you have your house paid off, your kids moved out, and had been maxing your retirement accounts out every year I think you’ll be just fine with a 4% withdrawal rate. If the market crashes one year, well then maybe don’t go on an international vacation and instead take a road trip to a national park. That’s just my two cents
You have 100% success by not listening to anyone on TH-cam. Everyone with a camera is now an expert. They’re all bums.
Enlighten us with your investing prowess, oh gifted one.