(Nerd's Eye View, August 14, 2013)
When explaining outcomes of a Monte Carlo retirement projection for a safe
withdrawal rate strategy, Mr. Kitces suggests replacing the
phrase "probability of failure" with "probability of a mid-course
correction" and replacing "probability of success" with "probability of
accumulating excess assets." He implies that this "framing" will help
facilitate good decisions.
Does renaming the outcomes of such a projection, as advocated by Mr. Kitces,
improve the safe withdrawal rate strategy or is he just putting lipstick
on a pig? In his article, Mr. Kitces implies that the safe withdrawal rate
approaches he anticipates aren't really the "set-it and forget-it"
approaches anticipated by Bill Bengen, the inventor of the 4% Rule. He
implies that a safe withdrawal rate strategy needs to be revisited periodically
to make sure that the client's spending plan remains on track (assets don't
shrink too rapidly nor grow too large). If this is true, however, there
seems to be little gained by doing all those calculations that comprise a Monte
Carlo projection over doing a simple deterministic projection (except
perhaps the impression of more precision). In both instances incorrect
projections of future experience need to be adjusted for actual experience.
Even though it employs a deterministic projection, I continue to believe
that the actuarial approach outline in this website is superior to the
"set-it and forget-it" safe withdrawal rate strategies. Once Mr. Kitces
describes how the approach he anticipates actually determines how and when
mid-course adjustments are made, I might be more open to endorsing it.