TIP$TER’s simulation engine projects the cumulative
“shortfall risk” of your portfolio. This is the estimated probability that an
investor or his or her spouse, if any, will outlive the portfolio.
TIP$TER’s estimated shortfall risk is the
combination of the risk of the investors' portfolio running out before the
targeted portfolio duration while they are still alive, plus the risk
that the investor or his or her spouse, if any, outliving your targeted
If an investor chooses a targeted portfolio duration that is simply equal to
his/her and his/her spouse’s combined life expectancy, the “shortfall risk” is
likely to exceed 50%, because there is at least a 50% chance that the investor
and his or her spouse would exceed that life expectancy.
COMPARISON NOTE: Most free
online simulators compute a shortfall
probability, or its opposite, the “survival” probability, over a fixed targeted
portfolio duration (like 30 or 40 years) – but without taking into account
actuarial statistics (the probability that the investor or his or her spouse, if
any, will be alive to suffer that shortfall).
TIP$TER’s shortfall risk estimate takes you and your
spouse’s life expectancies into account, both before and after your targeted
portfolio duration. To the extent that a simulated shortfall occurs near
the end of a long simulated period, the reduced likelihood of you or your spouse
being alive at that time reduces the computed shortfall
risk. To the extent that your targeted portfolio duration is too short,
the likelihood of you or your spouse outliving that period increases
the computed shortfall risk.