In this conversation, Wade Pfau and Alex Murguia discuss retirement planning and how to determine how much can be spent from a portfolio without running out of money. They touch on the use of Monte Carlo simulations and the funded ratio approach. They also highlight the limitations of Monte Carlo simulations and the importance of considering the magnitude of failure and the potential for underspending in retirement. The conversation emphasizes the need for individualized planning and the importance of working with a financial...
In this conversation, Wade Pfau and Alex Murguia discuss retirement planning and how to determine how much can be spent from a portfolio without running out of money. They touch on the use of Monte Carlo simulations and the funded ratio approach. They also highlight the limitations of Monte Carlo simulations and the importance of considering the magnitude of failure and the potential for underspending in retirement. The conversation emphasizes the need for individualized planning and the importance of working with a financial advisor. The conversation in this part focuses on the funded ratio and its implications for retirement planning. The funded ratio is a tool that measures the ratio of assets to liabilities in retirement. It is used to determine if a retiree has enough assets to cover their retirement expenses. The conversation also touches on the relationship between withdrawal rates and failure rates, the role of long-term care costs in the funded ratio, and the impact of political and environmental uncertainties on retirement planning.
Takeaways
- Monte Carlo simulations are a common method used in retirement planning to determine the probability of success, but they have limitations and can be sensitive to assumptions.
- The funded ratio approach, which focuses on a fixed rate of return, can provide a different perspective on retirement planning and allows for more control over assumptions.
- It is important to consider the magnitude of failure and the potential for underspending in retirement when using Monte Carlo simulations or the funded ratio approach.
- Individualized planning and working with a financial advisor are crucial for determining how much can be spent from a portfolio without running out of money. The funded ratio is a useful tool for assessing retirement readiness and determining if a retiree has enough assets to cover their retirement expenses.
- Higher withdrawal rates are associated with higher failure rates, so it's important to find a balance between spending and ensuring a successful retirement.
- Long-term care costs should be factored into the funded ratio as a contingency expense, as they are a high probability, high-cost event.
- Political and environmental uncertainties can be addressed through scenario analysis and contingency planning, but it's important not to let short-term events dictate long-term investment strategies.
- The Retirement Income Challenge offered by Retirement Researcher provides an opportunity to learn more about retirement planning and create a comprehensive retirement plan.
Chapters
00:00 Introduction
01:59 Retirement Planning and the Use of Monte Carlo Simulations
08:24 The Pros and Cons of Monte Carlo Simulations
25:19 Addressing Questions about the Funded Ratio
33:08 Incorporating Long-Term Care Costs in the Funded Ratio
Links
Join the waitlist for the next Retirement Income Challenge by visiting www.retirementresearcher.com/challenge
The Retirement Planning Guidebook: 2nd Edition has just been updated for 2024! Visit your preferred book retailer or simply click here to order your copy today: https://www.wadepfau.com/books/
This episode is sponsored by Retirement Researcher https://retirementresearcher.com/. Download their free eBook, 8 Tips to Becoming A Retirement Income Investor at retirementresearcher.com/8tips
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