Decoding The “Chance of Success” In Your Retirement Plan

You enter your income, expenses, investments, and liabilities into your favorite retirement planner. You click a button, the software does some kind of calculation, and out pops a single number.

It may be 87%. Maybe it’s 72%. Or it could be 15%. Whatever the number, you’re told it represents your retirement plan’s “Chance of Success.”

What exactly does that mean? How is it calculated? And what “Chance of Success” should you aim for? We’ll tackle these and other questions in this video.

Timestamps

0:00 - Chance of Success in Retirement
1:49 - FICalc
4:17 - New Retirement
6:57 - What number should we aim for?
10:14 - Rate of return assumptions
12:36 - Optimistic assumption/Pessimistic assumption
14:14 - Needing every single dime
15:02 - What if we things don’t work out as planned?
15:45 Financial Freedom

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ABOUT ME

While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.

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DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. Your investment and other financial decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary. I am merely sharing my opinions.

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[HopeToProsper]

Great overview Rob. I was really concerned with my probability of success when I first retired, and it had me frozen in fear. Then I realized I could pivot and remain flexible. Now I have a lot more confidence for the future.

[walterovercash]

Good video as usual. Two comments. One, my practice is to require a very high Monte Carlo number for the New Retirement Must Spend option and permit a much lower number for the Like To Spend option. Two, one must consider that having a high Monte Carlo number means that you have a high likelihood of dying with large savings, thus not enjoying your life as much as you could (see Die With Zero)

[genglandoh]

Very good point.
If you retire and you just barely have enough income to cover your expenses you might be at risk.
I was in that situation 2 years ago when the market dropped.
So in my case I worked another 2 years to
1. Get completely debt free. (lower our expenses)
2. Buy 2 good used cars so no big expense just after we retire.
3. Allow the market to get back to new highs (this way just luck)
I will be retiring in 10 days and I think we are ready.

[tfc]

Another great video. Thank you and I think we need to be flexible on our retirement spending based on economic conditions.

[Data_on_trail]

Great video, again. Years ago, I started thinking of the "Chance of Success" as my "Chance of having to/getting to modify my plans", since we have that flexibility. I also realize it's a semantic difference but it helps me think about our near / long terms options to make adjustments more comfortably.

[bsantelli]

I love your videos, but this is the best ever. Very, very few FA's tell you this kind of stuff.

[rickdunn]

@Rob Berger. I have been using NR+ for several years. I take a different approach. I look at the annual 10 year projections (from Morningstar and Vanguard) for my asset allocation (60/40), then I use that number, say 7.3% as my Average in NR+. To get the Average to = 7.3%, I put in optimistic and pessimistic values with a reasonable variation. When I run the Explorer, I view the "Median" as my result. I update this every year. Note for some of my accounts (Roth IRA for example), I have. a higher return as my Roths have all equities in them. So, I consider not only asset allocation, but location. I rant this by the NR+ folks, and they said this is a reasonable approach.

[MGunanaickJalapathi]

You definitely have my sub. This content is next level. For me Eledator was the turning point. Please keep doing what you do and keep being you, love it.

[Peter-cyn]

Excellent information. Thank you. I always learn a bit more each time I watch your videos.

[jimhron]

I love your perspective on this Rob. Primarily we need to understand the assumptions in our projections. This is the primary reason I like to be a DIY planner in addition to having a financial planner. If I just hire out this type of planning and trust the opinions of the planner, then I am not in as good of position to manage the plan as the plan plays out.

[kcnicely]

Excellent video! Flexibility is key and if you couple the flexibility with a dynamic withdrawal strategy you can pretty much ensure you will succeed.

[pfreeburn]

Thanks Rob! You brought up excellent points to consider when evaluating a plan's percentage rate for success. BTW, I had a conversation with my financial advisor yesterday on the same topic. After your video, I have a few follow up questions for my advisor. :-)

[mapmanlxii]

Thank you for explaining this I couldnt understand why NR pessimistic claculation craters everytime meanwhile average and optimistic make everything look doable or very rosy!

[AdityaKumar-gcpv]

Thank you for your research. I find your videos are well done. RIght now I'm keeping an eye on Eledator

[jaiden]

Great points. I just set my "must spend" and even with pessimistic assumptions I'm good to my mid 90s . If i really need to survive *50* years of sustained terrible conditions I'll rent rooms in my house to cover my double chocolate caramel truffle budget

[randolphh]

Great video!.
My advice is to use the various analysis like Monte Carlo to get an idea of what you need, and then to see how various adjustments and changes lead to different “success” rates.
As you said input leads to output.
I think that many lay people are not that good at math, let alone the concepts of statistics and probability. That is the major weakness of NR if you don’t understand those things well.

The idea of 95% success rates sounds nice, but as you say, is entirely dependent on inputs, not on facts. Also high success rates may leave a lot of money unspent, which can be good or bad.

Then the other big issue is that we assume the past predicts the future, which is useful, but also potentially wrong.

I don’t know if you have ever spoken about other ways to get to a similar point? The one that comes to mind is Wade Pfau’s concept of a Funding Ratio.

[berniekeene]

I use NR. I am OK with a Chance of Success rate of 90% with Average Assumptions. I would not be OK with a 90% Chance of Success with Optimistic Assumptions. That would bring the success rate using average assumptions down significantly. If I am expecting everything to go very well for the next 30-35 years, Optimistic assumptions, I would want the success rate to be 99%.

[rick_vv]

There is no set it (retirement plan) and forget it (ignore it) plan that will work. There are no shortcuts and the 4% rule is only a rule of thumb. A good retirement plan needs a good spending (expense) projection based on your anticipated spending needs with inflation adjustments, a projection of your income (SS, Pensions, Annuities and retirement withdrawals), an appropriate asset allocation for your risk tolerance, an appropriate expected return for your assets, a plan for dealing with medical, aging expenses and LTC and a plan for income taxes. Then you need to monitor (spending, investment performance, inflation, etc.) and adjust along the way to make sure that you are on track for your assets to get you through retirement.

[Mxm]

Great and timely topic..having the same question for a while

[scr]

I'm curious if there have been any studies with respect to people that retired at least 5 years ago based on Newretirement projections to see how accurate the software predicted things