I have 3 Million, What's the Problem? | An Argument Against 100% Probability of Success | Data Brief

Описание: Something that surprises a lot of people is that having a 100% probability of success in your retirement plan might actually mean you’re doing it wrong.

Welcome to Data Brief, where Eli Freeman, a certified financial planner, breaks down the data behind investing and retirement planning.

In this video, Eli makes the case that aiming for a “100%” Monte Carlo success rate is missing the point of enjoying your retirement. For the unfamiliar, the Monte Carlo simulation is where you can run your numbers through different scenarios to see how your money will last over retirement. However, as Eli explains, the Monte Carlo is good at the numbers, the data, the fractions, decimals and percentages but it cannot calculate human emotion and the unpredictability of life. In other words, you never know what could happen - either in the market, or in one’s personal life. Also, you might change your mind. You might want to spend more money on a car than you anticipated or change plans to travel more or less. The list of factors can go on and on. This is why Eli argues these kinds of tools can help us be aware of certain risks or impacts on a portfolio, but you should also enjoy spending the money you worked so hard to earn.

To illustrate this, Eli makes up some clients: Steven and Sandra.

Steven is 60, Sandra is 59, and they’ve done everything right:
-$3,00,000 invested
-$50,000 in cash
-$525,000 in a trust
-$2,100,00 in IRAs
-$400,000 in Roth IRAs


Steven plans to take Social Security at 70, Sandra will take her spousal benefit at full retirement age, and they want to retire immediately.
Their goals include:
-$8,000 in living expenses
-Private healthcare until Medicare
-$25,000 in travel expenses per year
-$50,000 for new cars for each of them every 7 years

The portfolio is earning roughly 6% annually and this results in a 97% probability of success. For a lot of people, this 97% isn’t enough. “Why isn’t it 100%?”

Steven and Sandra start cutting.
-Reduce their car purchases from $50,000 to $35,000 and that percentage jumps up to 99% success probability.

So, it technically “worked.” They cut back on expenses and got closer to 100% but did it truly matter? This was a discretionary choice, all their needs were met.

Eli says: If your plan only “fails” because of discretionary spending, then it’s not really failing– it’s flexible. Instead of asking how do we get to 100%, we should be asking what is driving the risk in this plan, because if the risk comes from things you can control, then you don’t need to eliminate it, you just need to be aware of it.

In Steven and Sandra’s plan, they are leaving behind around $7,00,000 to their beneficiaries. But what if they wanted to travel more? Spend more? They could have!

Adjusting Steven and Sandra’s plan to include a larger traveling budget, the percentage goes down to 91% success rate. That means in 9 scenarios out of 10, their plan is successful. In other words, in only 1 scenario out of 10, they would need to make adjustments - not adjustments out of a failure to meet needs, but adjustments of discretionary purchases. Maybe the market is really low one year, so you travel less or get a less expensive car, those kinds of small adjustments.

With that 91% success rate, the travel budget was doubled. So the question is - what would you choose? Do you feel like you need as close to 100% as possible or are you okay with some uncertainty if it means enjoying your retirement?

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⚠️ Disclosure:
The views expressed in this video are solely the opinions of the participants and are provided for informational purposes only. They should not be construed as investment advice, a recommendation, or a guarantee of future performance. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. Any securities or companies mentioned are for illustrative purposes only and do not constitute a recommendation to buy or sell. For more information about Mach 1 Financial Group LLC, please refer to our current disclosure brochure available through the SEC website or at disclosures.mach1fg.com.