Setting - Min/Max

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herveb
Posts: 2
Joined: Fri Sep 13, 2013 12:38 pm

Setting - Min/Max

Post by herveb »

I have tried using different settings for the min/max funding parameters and get confusing results. When min=90 and max=150, I get 100% I get a probability of success of 100% and a green light. when I set min=75 and max=150 I get probabilty of success 100% but a yellow light and an average shortfall of 0%. Because I lowered the minimum funding rate that can be used, shouldn't I get a green light?

jimr
Posts: 601
Joined: Thu Feb 28, 2008 6:48 pm

Re: Setting - Min/Max

Post by jimr »

Yeah, the way the light works can be confusing.

The yellow light signifies that spending was reduced to less than 80% at some point during retirement. If you set the minimum to 80%, you won't see the yellow light.

In the case you describe, the plan is very robust and doesn't really need the reduction in spending after all. Unfortunately, the simulation logic doesn't know that things will turn out ok and it just implements the spending reductions according to plan whenever the portfolio value drops below the starting portfolio value.

Another parameter to tune is the spending adjustment multiplier. If you set this to something like .5 or so, it may prevent the simulation from reducing spending so fast and by the time the reduction gets close to 80%, the portfolio will have grown enough (in the worst case runs) so further reductions wouldn't be needed.

As you can see, this is art as much as science and playing around with how these settings interact is a great way to gain a better understanding of the dynamics of your plan. Also, be sure to try out the sensitivity analysis feature to get a better idea of how your plan might do under varying input assumptions.

Best,

Jim

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