“The odds of that goal being fully funded are super low, given the initial assumed withdrawal rate of 10% to fund the gap [from $95,000 to $100,000],” Blanchett explained. “But the vast majority of the goal is going to be accomplished [even in a ‘failing scenario’] because 95% of the goal is covered with lifetime income.”
Additionally, even assuming that the portfolio always fails after the 15th year of retirement, 97.5% of the overall retirement goal would be covered. This, of course, can easily be obscured by the 0% “success” projection.
“This context of ‘you’ll accomplish 97.5% of your goal, on average’ offers a very different perspective than ‘there is a 0% chance you’ll accomplish your retirement goal,’” Blanchett observed.
Percentage of Goal Metrics Are More Useful
As the example demonstrates, there is good reason for wealth managers to be hesitant about presenting non-contextualized Monte Carlo projections to clients. While they can make retirement look scarier than it needs to be, high projected probabilities of success can also lead clients into reckless spending behavior.
“I think a better way to provide context to clients is around things like the percentage of the total goal completed — or maybe the income that would be generated at a given age at a given percentile,” Blanchett argued.
For example, an advisor might present the following: “In the worst one in 10 scenarios, we would expect you to have $50,000, in today’s dollars, in income.”
“Not only do I think providing the [binary success-failure] metric isn’t going to lead to optimal retiree behavior, but I think the metric itself isn’t really the best way to be thinking about quantifying outcomes,” Blanchett added.
Even if the probability of success was more comprehensive, Blanchett said, he still doesn’t like relying on any single number or figure.
“One person may be terrified about a 90% success rate, while someone else might be really excited,” he observed. “What’s important to note is the exact number doesn’t really matter. That’s kind of the point of the post, which is what I think planners should be doing — defining a reasonable target.”
That said, doing forecasts and having a financial plan is critical, Blanchett concluded.
“I just think we need to be more aware (as an industry) in terms of how people interpret the results and fundamental errors in the forecasts,” he said.
Pictured: David Blanchett
