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Retirement, because it might easily last 30 years or more, is a project of probabilities. By understanding the potential risks and opportunities in your unique retirement plan, you can understand the chances you are taking.

It is quite easy to create a “textbook perfect” financial plan. The problem, of course, is that nobody has a textbook perfect life. Very few people live the exact average lifespan, experience the exact average inflation rate, have portfolios that return the exact average rate of return, or suffer from the exact average medical expenses. Those are just four common variables in a retirement plan. Two additional ones are (1) the amount of income and (2) the amount of money you will spend each year in the future.

So how do you account for the different values that each of those variables might have? 
One choice is to hope that your life in retirement turns out to be textbook perfect. Examine whether your current life has been textbook perfect up to this point. No? Then it’s not very likely that it will be so in the future.

Another choice is to do a statistical analysis of the historic actual values and potential future values for each variable in your retirement equation. Then, weight each of those values by its probability of occurrence, and then factor in all of the possible combinations of all of those variables. Finally, run about a thousand trials and compile the results into a single probability of success. In this case, let’s define success as having positive portfolio assets in all years and meeting the required level of portfolio assets in the final year of simulation. In other words, never running out of money along the way and ending up with the desired amount at the end. To be thorough, calculate a Worst Case Scenario, a Best Case Scenario, and a Most Likely Scenario.

Ummm...I don’t have a Ph.D. in Probability and Statistics
This is where Trilogy’s DecisionCenter  comes in. The statistical procedures described above can be accomplished by your Trilogy advisor with a technique called Monte Carlo Analysis, which is a key component of DecisionCenter financial plans. The technique uses randomization of certain variables (within historic and likely boundaries) to imitate the random return behavior of real life. A Monte Carlo simulation is a statistical projection in the use of probability financial analysis, of possible outcomes produced by combining pieces of key information in random order. In financial analysis, software-generated combinations of a range of economic variable, such as interest rates, tax rates, inflation rates, and various hypothetical investment portfolios and strategies, which can generate thousands of possible outcomes, called scenarios, in the attempt to predict the most probable results for those portfolios. As a result, it’s designed to account for the uncertainty and performance variation that’s always present in financial markets.

If your financial plan’s success factor is lower than you feel comfortable with, all is not lost. While some of the variables are outside of your control, there are some variables that you can realistically influence through your own behavior. Examples include: planned spending levels, timing of retirement, investment portfolio composition, and current savings rate. Adjustments can be made to these parts of the plan and then the statistical analysis can be repeated. 

Once a desired success factor is reached, you and your advisor can work together to set behavior goals, create accountability, provide motivation, monitor your progress, and adjust periodically as necessary. If your current advisor isn’t doing all of those things for you, try one of ours!

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