Notes and Terminology


General Approach 
Retirement Quant simulates your financials over your expected lifetime, defined by you.  Your lifetime is simulated over two distinct periods, the time before and the time after you start your retirement.  Retirement Quant assumes that you start your retirement at an age defined by you where you state you wish to receive your specified retirement income.  You specify this in the Retirement Strategies dialog box.

Before Retirement  In the years before retirement, Retirement Quant is simulating the build up of your retirement assets.  In each simulated year, it takes your income and subtracts taxes and expenses to see how much you are adding to your savings.  It also adds employer contributions to savings plans.  At the end of each simulated year, it calculates the return on the portfolio investments, including your new additions.

During Retirement  Retirement years are simulated a little differently than the years before retirement.  The difference is that only the retirement income level is simulated and expenses are ignored.  During retirement years, it is assumed that any income you receive will be less than the cost of your desired standard of living and that you will be drawing down your assets to make up the difference.  In other words, you are no longer saving for retirement.  During the simulated retirement years, Retirement Quant will start with your desired target retirement income and subtract any work, pension or Social Security income.  The difference will need to come from your retirement assets.  At the end of each simulated year, your portfolio returns are calculated and added to your assets.

Analyses  Each of the Retirement Quant functions is designed to help you understand the effects of your decisions.  Important outputs of the simulation are:

  • Success Rate - This is the number of simulations that succeeded divided by the total number of simulations.  It is not a prediction of the future.  By design, Retirement Quant will never report a 100% success rate, there is no 100% success rate when dealing with future financials.   "Fooled by Randomness" by Taleb, should be required reading.

  • Earliest Failure Age - This is the youngest age at which a simulation failed.  It can be useful information when looking at the risks of your retirement strategy.  For example, a strategy in which the earliest failure is age 79 carries more risk than a strategy that had an earliest failure age of 89.

  • Median Retirement Income PV - Retirement Quant keeps track in each simulation of your income at the time you say you wish to retire.  Because this is a simulation, there may be a range of retirement incomes.  This value is the "median" which means that half the simulations produced results lower than this and half had results higher than this.  "PV" stands for "present value" which is the value of the median retirement income in today's (constant) dollars.  If you specify a particular retirement income amount, that value will be used here.

  • Median Retirement Assets PV - This value is analogous to the median retirement income except that it is the value of your assets at retirement.  Retirement Quant does not consider the value of your home and property as retirement assets.

  • Initial Withdrawal Percent - This is the amount of your asset withdrawal divided by your total retirement assets at the time of your retirement.

  • PV of Final Retirement Income - This is the present value of your retirement income in the last year of your retirement.  If you do not use decision rules, this number will be the same as your initial retirement income.  Usually both the median and confidence level numbers are presented.  The median value means that half the simulations resulted in incomes higher than this and half with lower values.  The confidence level is the percent of simulations that result in a value equal to or greater than the one shown.  For example, if the confidence level is 95% and the PV of final retirement income is $50,000, it means that 95% of the simulations resulted in a final retirement income PV equal to or greater than $50,000.

  • PV of Total Retirement Income - This is analogous to the PV of final retirement income except that it represent the total of all your withdrawal over your lifetime.

  • Variance Limit - This is used as a measure of the variability of your retirement income.  It is expresses as a percent.  In each simulated retirement year, Retirement Quant will test if the withdrawal (in constant dollars) is below the initial withdrawal by this percent.  It will then tell you what percent of simulations had variations greater than this and for how long.

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