Welcome back to A Smarter Way to Retire! I’m Tony Leonardi, your CFP® professional based in Fairfield County, Connecticut, here to guide you through retirement planning. Today we’re diving into Step 9 of our 10-step process: Measuring Your Probability of Success. This is where all the hard work from the first eight steps—defining goals, building your financial model, assessing risk tolerance, considering longevity, and analyzing investments—comes together. Let’s explore how to ensure your retirement plan is on track.
Why Measure Your Probability of Success?
Retirement planning isn’t just about saving and investing; it’s about ensuring your money lasts as long as you do. Many assume they’re set for retirement, but without measuring your probability of success, you might miss critical risks. Step 9 answers the big question we all have: Am I going to be okay? Is my family going to be okay? If not, what adjustments can we make to secure your future?
Key Factors in Measuring Retirement Success
To gauge your plan’s likelihood of success, we analyze several components:
- Expected Expenses: Your annual spending, covering essentials (needs), discretionary items (wants), and dream goals (wishes), as outlined in Step 5.
- Income Sources: Social Security, pensions, rental income, and savings withdrawals—finding the right withdrawal rate to sustain your lifestyle.
- Investment Returns: The expected rate of return on your portfolio over time, considering market volatility.
- Inflation and Taxes: The impact of rising costs and taxation on your purchasing power, especially with inflation being a hot topic recently.
- Longevity Risk: How long your retirement might last, based on family history and health, a topic we covered a few weeks ago.
Each factor from the first eight steps plays a critical role in determining whether your assets can support your lifestyle for the long haul.
The Power of Monte Carlo Simulation
One of the most effective tools for this step is the Monte Carlo simulation. Don’t worry—it’s not gambling, despite the name’s association with Monaco! This powerful method runs thousands of market scenarios to estimate your plan’s success rate. Unlike assuming a single rate of return, it accounts for market volatility, which doesn’t move in a straight line.
Monte Carlo helps us prepare for uncertainty. We know markets will be volatile; we just don’t know when. By simulating everything from smooth sailing to stormy seas, we can see how your portfolio might hold up. A key risk to consider is sequence of returns risk. A major downturn early in retirement—say, a 20-40% market drop while you’re withdrawing funds—can have a snowball effect. But the same recession late in retirement, after 20-30 years of growth, might barely dent your plan. Monte Carlo stress-tests these scenarios, helping us build a resilient plan.
Think of it as a financial crystal ball—powered by smart math, not magic. It might reveal an 85% probability of not running out of money (a strong position) or a 50% chance (indicating adjustments are needed). Ideally, we aim for a 70-90% success rate.
What If Your Probability Is Low?
If your probability of success is below 70%, don’t panic—adjustments can help. Consider these options:
- Adjust Spending: Reduce discretionary expenses during downturns, like skipping a luxury trip.
- Change Retirement Age: Work a few extra years or part-time to improve your outlook.
- Reallocate Investments: Ensure your assets are working efficiently for your goals.
- Increase Savings: If possible, save more before retiring.
Often, a combination of these strategies works best. We’ll dive deeper into adjustments in our next episode, Step 10.
Balancing Risk and Reward
The goal isn’t a 100% success rate—life is uncertain. A plan with a 99-100% probability might carry the risk of underspending, where you’re too conservative, missing out on dream vacations or even a cup of coffee. I’ve seen retirees in Fairfield County hesitate to spend, fearing they’ll outlive their savings. One of my favorite moments is helping a client with a high success rate—like a recent one who bought their dream car after a Monte Carlo analysis confirmed they could afford it. Seeing their joy in those car photos was priceless!
On the flip side, chasing higher returns to boost a low probability can backfire. More expected return means more volatility, which can lower your success rate due to sequence of returns risk, especially early in retirement. A balanced approach is key.
Keep Monitoring Your Plan
Measuring your probability of success isn’t a one-time task—it’s an ongoing process. Regular monitoring and adjustments keep you on track. Retirement planning is dynamic, and being proactive builds confidence. Stay tuned for our next episode on making necessary adjustments to fine-tune your plan.
For more insights, visit LeonardiFamilyWealthcare.com or download the 2025 Retirement Reset Checklist to start planning. Whether you’re in Fairfield County or beyond, let’s build a smarter retirement together!