Friday, March 20, 2015

What measures are useful in retirement planning besides the probability of goal success?


When analyzing whether a financial plan meets the retirement goals of the client, there are two measurements, other than the probability of whether the client meets goals, that I find useful.  They are both related to what I would call the "magnitude" of success.

One is the number of years the client is alive and without assets.  This I call the number of years "in ruin".  A plan with a 95% success rate, but with an average number of years of ruin of 7 for the 5% of the time the plan fails, might be not as good as a plan with a 90% success rate, but with an average number of years of ruin of 2 for the 10% of the time the plan fails (the client can decide which plan is better).

The other measure is, for the scenarios that are successful, the amount (either an average or a probability distribution) of assets remaining at the time of death.  This can be considered a potential "legacy" for the heirs of the client, or as a "margin of error" for the various scenarios.

These two additional measures gives a much fuller picture of the possible outcomes for the client.

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