Wednesday, August 14, 2013

Renaming The Outcomes Of A Monte Carlo Retirement Projection

(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.