Entering lump-sum inheritance lowers probability of success

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Teacher in CA
Posts: 4
Joined: Wed Aug 11, 2010 7:08 pm

Entering lump-sum inheritance lowers probability of success

Post by Teacher in CA » Wed Aug 11, 2010 7:33 pm

Hi,

I expect a modest inheritance that will boost my portfolio shortly after I retire. But when I enter, say, $100,000 as a one-time savings a couple years after retirement, my whole plan is less successful, and the ending portfolio value is less.

Why is this? And is this the best way to enter a one-time windfall I intend to invest?

Thanks,

Teacher in CA

jimr
Posts: 514
Joined: Thu Feb 28, 2008 6:48 pm

Re: Entering lump-sum inheritance lowers probability of succ

Post by jimr » Wed Aug 11, 2010 7:38 pm

Hmmmm, I'm surprised that adding that extra $100k made your results worse. That just shouldn't happen.

It's probably worth checking in the "detailed view" tab to make sure it shows $100k in the "new investments" column at age 63. Another thing to try is run the program twice, once with the $100k and once without (just uncheck the enabled box in additional inputs). Then click the show all runs button. On that new window, check the "show failures" under the graph to show how many times the simulation failed in each year, Then select the two different runs and compare the graphs and the failures. You may find that the extra $100k ends up being small compared to your overall portfolio size and your overall spending.

Still, if everything is working right adding more funds shouldn't make your results worse. I'll have to think about this a bit more to see what I can come up with.

Jim

Teacher in CA
Posts: 4
Joined: Wed Aug 11, 2010 7:08 pm

Re: Entering lump-sum inheritance lowers probability of succ

Post by Teacher in CA » Wed Aug 11, 2010 7:43 pm

One more thing...

I think when I enter the inheritance, the program pays out more money in the middle years, drawing down my portfolio. It wants me to travel and remodel my kitchen after retirement! Interestingly, when I set the financial policy to “stable” instead of flexible, the program gives me better results with the inheritance, and worse without it.

jimr
Posts: 514
Joined: Thu Feb 28, 2008 6:48 pm

Re: Entering lump-sum inheritance lowers probability of succ

Post by jimr » Wed Aug 11, 2010 7:45 pm

I think you've stumbled into a quirk in how the planner handles the flexible spending policy.

The algorithm takes the starting portfolio value into account when making adjustments. Since the additional savings increase the portfolio value above the value at the start of retirement, the increases are more generous than they would otherwise be (the planner is tricked into thinking things are going really well).

You can adjust the upper and lower bounds that are used by the flexible spending policy through the settings window. You could set the upper bound at 100% or 125% for example.

Also, in case you haven't seen this yet, here's the documentation for spending policies.

Jim

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