Saturday, April 27, 2013

Odds of success

9:50 PM



Question:

When I run a Monte Carlo simulation, I get 92% success odds, but the assets at retirement show a shortfall.

When I look at the charts, it looks like there is/may be a slight shortfall near 85-90…

Why does this happen?

Answer:

Each capital market simulation looks at whether you have enough funds and income to pay your expenses for the rest of your life.

Suppose you have enough each year of retirement except that during the very last year at age 90 you are short by $10,000. I would consider this a success even though you are technically short by a small amount. After all, your selection of life expectancy is a best guess, or better, a safe guess.

There is an option in the Monte Carlo settings that allows you to count cases with small shortfalls as a success. You can modify the setting to only consider cases that have no shortfall, or select the amount you think is reasonable for your purposes.

If this does not explain your issue, I can have a look at your calculation if you give me permission to review your file.

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