Monte Carlo suggestion
I would like to see the Monte Carlo produce output in the following way :
1. Allow me to specify a % likelihood of "plan failure"
2. Define "plan failure" as a lifetime living standard below a certain threshold.
For example : I could input that I am only willing to accept a 1% chance that my LLS is below $100K, what should I be spending now in order to accomplish this ?
Right now, the output from Monte Carlo doesn't easily enable me to determine this information, or if it does, I am looking in the wrong place.
RSS
I'm familiar with a number of conventional retirement calculators and that tends to be the way they report. They report the chances that one's funding from a retirement account runs dry. But a problem with this approach is that--and you know this part--they are reporting on a isolated sum of money, not on living standard, which is a much more complex calculation.
When you say, "lifetime living standard," what do you mean? Do you mean average living standard? The MC is intended to help us see past the "average" and view the upside and downside potential of a particular asset allocation.
So when you look at the percentile distribution of living standard, you see there the distribution of living standard in each year for the rest of your life.
If you look at trajectory living standard, you see another dimension of this. You see the ups and downs of a particular living standard thread--the high, middle, and low living standards determined by the Monte Carlo.
To assure that you have just a 1% chance of not dropping below 100K you adjust your asset allocation so that the 5th percentile line of the living standard distribution never goes below 100K.
Dan
Thanks for the reply Dan, but I don't understand this part :
"To assure that you have just a 1% chance of not dropping below 100K you adjust your asset allocation so that the 5th percentile line of the living standard distribution never goes below 100K. "
How does the 5th percentile tell me what is going on in the 1st percentile ?
I thought of another way to deal with this issue; perhaps you could allow us to input the maximum that we would spend in any given year, aside from special expenses.
For example, if my "annual recommendation" is $150k, but I am happy to live on only $100K, then let me put that number in, and run the simulation with me spending only $100K instead of $150K for that year, with the excess money that I could have spent going back into the regular investment funds.
I know that you plan to change the MC to allow for "utility maximization", but perhaps this would be an easy fix that you could implement quickly prior to the full-blown UM build.
Somehow it seems that my second reply is not there.
Oh well. . .
You can accomplish this by telling the program that you want to live on say 90% of your available living standard now and gradually ramp up later. This will tip the MC chart upward--which is good. It's a way of say that you want to be conservative now and not live as high a living standard as possible.
You do this with the living standard adjustment in the Assumptions area.
Try putting it at 85% and having it ramp up at 1% a year. (use grow)
Dan