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Probability of success is a common and relatively simple metric to compute and explain, but it is not a good one. If you retire at 60 and expect to live until 9

Probability of success is a common and relatively simple metric to compute and explain, but it is not a good one. If you retire at 60 and expect to live until 90, there is a big difference between running out of money at 70 vs. 85. A metric such as expected shortfall https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3674232 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3674232 is better since it considers the magnitude of the shortfall.

scubakid 3y ago
The monte carlo module includes the ability to break down outcome categories based on how far you make it during each trial. But I definitely want to add more metrics and customization to that mode over time. Expected shortfall (I assume from point of failure till end of plan?) sounds like a good one!
irrational 3y ago
This is one that concerns me. My family members typically live into their 100s and are still very independent and mentally healthy up until a week or so before dying. I am incredibly healthy and don’t expect anything different, barring accident. I plan on waiting as long as possible to start collecting social security, but I’m wondering what else I need to consider when anticipating 30-40 years of retirement.
Syzygies 3y ago
Yes, the twin idiocies of the freebie planners offered by the major investment firms: "Expect to live until" huh? My death has a probability distribution that's better understood than the market, any Monte Carlo simulations should include varying my life expectancy? And "probability of success" huh? Are we so stupid that we fly the plane into a mountainside at 85, rather than modifying behavior? I want to simulate my actual varying life expectancy and varying budget as I respond to market forces. Our house is paid off and I'm a great cook, but I love to spend money as our budget allows. MaxiFi Planner is the best consumer tool I know; my advisor also uses it. A puzzle that's too hard for it, making me want to script scraping its reports: Should I choose an annuity for part of my TIAA-CREF retirement savings? Even if one understands that the answer is generally no, there's always a number that flips the decision. TIAA annuities pay more than market, but enough more? There's an annuity paradox that programs like MaxiFi Planner reveal: Even a poorly priced annuity lets one plan to spend more. On the other hand we want to optimize our daughter's inheritance. Economists optimize varying notions of "utility". The above is a game, scoring what one gets to spend adapting to market conditions, taking into account the inheritance as one's year of death varies. This is beyond any planning software I've seen, yet it's exactly the game I will instead play out badly by hand.
- Bostonian 3y ago
  A current WSJ article may interest you: "A Retirement Tax Break That Ends the Fear of Outliving Your 401(k): The pros and cons of using your nest egg to buy a special longevity annuity in retirement" https://www.wsj.com/articles/retirement-tax-break-qlac-annuity-contract-ee88fe4c https://www.wsj.com/articles/retirement-tax-break-qlac-annui...
tunesmith 3y ago
I really like the "early retirement now" spreadsheet for that reason. (https://earlyretirementnow.com/2018/08/29/google-sheet-updates-swr-series-part-28/ https://earlyretirementnow.com/2018/08/29/google-sheet-updat...) It allows you to plug in expected cash flows and your allocation model, and compares it to the stock market history to get a safe withdrawal rate. Using that you can also try out alternate scenarios like "what if I converted x00k of my savings to an annuity in exchange for a predictable cash flow" and see how it affects your withdrawal rate.

scubakid 3y ago

The monte carlo module includes the ability to break down outcome categories based on how far you make it during each trial. But I definitely want to add more metrics and customization to that mode over time. Expected shortfall (I assume from point of failure till end of plan?) sounds like a good one!

irrational 3y ago

This is one that concerns me. My family members typically live into their 100s and are still very independent and mentally healthy up until a week or so before dying. I am incredibly healthy and don’t expect anything different, barring accident. I plan on waiting as long as possible to start collecting social security, but I’m wondering what else I need to consider when anticipating 30-40 years of retirement.

Syzygies 3y ago

Yes, the twin idiocies of the freebie planners offered by the major investment firms: "Expect to live until" huh? My death has a probability distribution that's better understood than the market, any Monte Carlo simulations should include varying my life expectancy? And "probability of success" huh? Are we so stupid that we fly the plane into a mountainside at 85, rather than modifying behavior? I want to simulate my actual varying life expectancy and varying budget as I respond to market forces. Our house is paid off and I'm a great cook, but I love to spend money as our budget allows. MaxiFi Planner is the best consumer tool I know; my advisor also uses it. A puzzle that's too hard for it, making me want to script scraping its reports: Should I choose an annuity for part of my TIAA-CREF retirement savings? Even if one understands that the answer is generally no, there's always a number that flips the decision. TIAA annuities pay more than market, but enough more? There's an annuity paradox that programs like MaxiFi Planner reveal: Even a poorly priced annuity lets one plan to spend more. On the other hand we want to optimize our daughter's inheritance. Economists optimize varying notions of "utility". The above is a game, scoring what one gets to spend adapting to market conditions, taking into account the inheritance as one's year of death varies. This is beyond any planning software I've seen, yet it's exactly the game I will instead play out badly by hand.

Bostonian 3y ago
A current WSJ article may interest you: "A Retirement Tax Break That Ends the Fear of Outliving Your 401(k): The pros and cons of using your nest egg to buy a special longevity annuity in retirement" https://www.wsj.com/articles/retirement-tax-break-qlac-annuity-contract-ee88fe4c https://www.wsj.com/articles/retirement-tax-break-qlac-annui...

tunesmith 3y ago

I really like the "early retirement now" spreadsheet for that reason. (https://earlyretirementnow.com/2018/08/29/google-sheet-updates-swr-series-part-28/ https://earlyretirementnow.com/2018/08/29/google-sheet-updat...) It allows you to plug in expected cash flows and your allocation model, and compares it to the stock market history to get a safe withdrawal rate. Using that you can also try out alternate scenarios like "what if I converted x00k of my savings to an annuity in exchange for a predictable cash flow" and see how it affects your withdrawal rate.