Investing
Reading your own retirement projection
A projection is a set of assumptions wearing a chart. What each assumption does, which ones move the answer most, and where to be conservative.
The chart is the least important part
Every retirement projection produces a confident-looking curve. The curve is arithmetic; the assumptions underneath it are judgement, and they are where the answer actually comes from.
Four inputs move the result more than anything else: the return you assume, the inflation you assume, how much you contribute, and how long the money has to last.
Return, and why the number looks low
A blended return of 6.8% on a portfolio holding both equities and bonds is a reasonable long-run assumption. It looks pessimistic next to recent equity returns, and that is the point: a projection built on the best decade you can remember is a projection built to disappoint.
Raising the assumed return is the easiest way to make a plan look successful and the least honest.
Read the range, not the middle
A Monte Carlo projection runs the plan thousands of times against varying market conditions and reports the distribution. Across 10,000 paths a plan might show a median of $2.4M, with 78% of paths clearing the $2.1M target.
The median is the number people quote. The tenth percentile, say $1.6M, is the number worth planning against, because it describes the outcome where things went badly and you still have to eat.
A plan that only works at the median is a plan that fails roughly half the time.
What a withdrawal rate means
The 4% rule is shorthand for the amount you could withdraw annually, adjusted for inflation, with a high probability of the money outlasting a thirty-year retirement.
On a $2.4M median that is about $96,000 a year before tax. On the tenth-percentile $1.6M it is $64,000. Both are worth knowing before you decide a number is enough.
Retiring earlier lengthens the horizon, and a longer horizon pushes the sustainable rate down rather than up.
Change one input at a time
The useful exercise is not finding the assumptions that produce a comfortable answer. It is seeing which change moves the answer most.
For most people it is the contribution rate, and it is the only one of the four you fully control.
