Spend to Zero

[Syner01]

how to spend to zero in simulation? not looking for an account balance or a low one at the end of the run. prefer the model focus on my retirement spending vs keeping a balance at the end.

[jimr]

FRP isn't really "trying" to have a positive portfolio value at the end of the plan. It just works out that a plan with a high probability of success is very likely to have a large portfolio balance at the end. In a sense, the large ending portfolio value gives the plan the cushion that allows it to show a high probability of success.

As an experiment to (hopefully) understand this better, you could do a series of planner runs where you manually adjust the annual retirement spending amount up or down between each run to try to find the spending level that results in a probability of success that's exactly equal to 50%. Usually when the probability of success equals 50%, the ending portfolio value will be close to zero. (You'll probably want to set the spending policy to stable during this test to keep things simpler).

Unfortunately though, this means if a retiree actually tried to retire with this spending level, they'd end up running out of money at least half of the time before the end of the plan.

[TomS]

FRP isn't really "trying" to have a positive portfolio value at the end of the plan. It just works out that a plan with a high probability of success is very likely to have a large portfolio balance at the end. In a sense, the large ending portfolio value gives the plan the cushion that allows it to show a high probability of success.

As an experiment to (hopefully) understand this better, you could do a series of planner runs where you manually adjust the annual retirement spending amount up or down between each run to try to find the spending level that results in a probability of success that's exactly equal to 50%. Usually when the probability of success equals 50%, the ending portfolio value will be close to zero. (You'll probably want to set the spending policy to stable during this test to keep things simpler).

Unfortunately though, this means if a retiree actually tried to retire with this spending level, they'd end up running out of money at least half of the time before the end of the plan.

Another way to look at this is that when POS is 50%, it means that the probability of a spending cut for the coming year at that point in time is 50%. Which means that there's an equal chance in that year that no spending cut will be needed.

MC POS shouldn't be 'set it and forget it'. A guard rails approach uses MC to re-evaluate the POS at least once a year, or more frequently if portfolio size goes through a rapid change due to market performance or spending. Here's a good article in Kitces that explains this quite nicely: https://www.kitces.com/blog/guyton-klin ... isk-based/