Generating "success rate" probabilities using a fixed budget model
Many financial planning simulators model retirement spending using a fixed budget. These programs typically simulate a portfolio on the silly assumption that retirees would strictly adhere to their originally planned retirement budget even if outsized growth enabled them to spend far more.
For instance, take a look at page 26 of the Wagner Math Finance "Premier Retirement Planner" RSP 3 User Manual.* It illustrates a graph of projected retirement spending for the 10, 20, and 30 percentile trials of a simulation. Each of the trials show a fixed retirement budget until the money runs out.
Other commercial financial planning simulators – for instance, Money Guide Pro* and Financeware* – model a slight amount of variability by providing an "Acceptable" spending parameter in addition to an "Ideal" one.
But it is still apparent – from the way in which the sample "portfolio size" charts blow up – that neither the Money Guide Pro* planner nor the Financeware* planner simulates increases in retirement planning proportional to the size of a bull-market-fattened portfolio.
The long and short of it is that most simulators fail to realistically model retirement spending.
Because they don't realistically
model retirement spending, they cannot effectively measure the "risk" and
"reward" of an equity portfolio in a sensible way: in terms of the
distribution of retirement budgets the portfolio is likely to support.
To learn about TIP$TER's realistic retirement budget spending model, click here.
Financeware, Inc., is a trademark of Financeware, Inc., which which Prospercuity claims no sponsorship, connection, affiliation, or association.
Money Guide Pro is a trademark of PIETech, with which Prospercuity claims no sponsorship, connection, affiliation, or association.