Morningstar: Hidden Assumptions of Financial Calculators
- Thread starter bizlady
- Start date
donheff
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
You need to briefly summarize so readers can decide whether to read.
The article basically complains that sophisticated modern retirement calculators are better than old assumptions that used a single rate of return. But despite monte carlo runs, and historical scenarios, the calculators still tend to return a single result at a chosen success rate - say 90%. Better would be to return results at several success rates (e.g., 100%, 95%, 90%, 75%, 50%, 25% in his example) to provide more comprehensive information. No big news to erdotorg denizens.
The article basically complains that sophisticated modern retirement calculators are better than old assumptions that used a single rate of return. But despite monte carlo runs, and historical scenarios, the calculators still tend to return a single result at a chosen success rate - say 90%. Better would be to return results at several success rates (e.g., 100%, 95%, 90%, 75%, 50%, 25% in his example) to provide more comprehensive information. No big news to erdotorg denizens.
That particular author is often worth reading. It is an article aimed at novices in retirement planning, telling them to consider a range of possibilities. It did have a link to FireCalc, so that may help folks that have never seen it get started.
But I hope the article doesn't scare people too much. It shows the 30 year 100% success withdrawal rate as 2.4%! That is from a Monte Carlo simulation, so is far lower than historical simulations. I wouldn't panic, that's just how Monte Carlo works; by it's nature, it always must produce fatter distribution tails than anything ever observed (if we were to observe something worse, then the parameters going in to future MC simulations would be adjusted, making future MC simulations even scarier).
But I hope the article doesn't scare people too much. It shows the 30 year 100% success withdrawal rate as 2.4%! That is from a Monte Carlo simulation, so is far lower than historical simulations. I wouldn't panic, that's just how Monte Carlo works; by it's nature, it always must produce fatter distribution tails than anything ever observed (if we were to observe something worse, then the parameters going in to future MC simulations would be adjusted, making future MC simulations even scarier).
