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