Reframing Monte Carlo Results To Increase Trust In Dynamic Retirement Spending

Today, Kitces published a great article co-authored by Derek Tharp, Ph.D., CFP®, CLU®, RICP®. Throughout the article Derek explains a major issue with the success/failure framing is that it is overly binary and fails to capture the reality that retirees can adjust when needed, and that it often only takes small spending adjustments to keep a plan on track. As a result, it has been suggested that a ‘probability of adjustment’ framework, instead of one based on ‘probability of success’, may better convey the actual consequences for retirees.

Here are a few of the main points:

• A key takeaway here is that referring to the “probability of adjustment” as the probability that downward adjustment is needed to avoid portfolio depletion is not the same thing as referring to it as the probability that downward adjustment is called for in a dynamic retirement spending 
• Communicating results from a guardrails-based plan in terms of dollars to clients is likely far more effective for communication than reporting a probability of adjustment metric, given the ambiguity and confusion that exists around that term itself.

Justin Fitzpatrick, PhD, CFA, CFP

Justin Fitzpatrick is President and Co-Founder of Income Lab, retirement income planning software used by thousands of financial advisors. He developed the guardrails-based approach to retirement income distribution after a decade in financial services at Jackson and seven years in academia at MIT, Harvard, and UCLA. His research on adjustment-based planning has been published on Kitces.com, ThinkAdvisor, AdvisorPerspectives, and FinancialPlanning Magazine.

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