“Every good plan starts with realistic assumptions about your asset mix, savings rate, spending needs, and life expectancy,” says Rob Williams, managing director of financial planning, retirement income, and wealth management at the Schwab Center for Financial Research.
To measure the odds that your plan will succeed, financial advisors typically run what’s called a Monte Carlo simulation. Instead of projecting one smooth path forward, this simulation runs 1,000 possible scenarios, using varying market returns and inflation levels to show a range of potential outcomes. The results are presented as a percentage of times your plan achieved its goals, known as its success probability. A result of 85%, for example, means your plan failed only 15% of the time.
The goal isn’t to achieve a probability of 99%—statistically speaking, the highest possible result—but rather an acceptable degree of certainty, depending on your goals and risk tolerance. “Many clients often set a target of 90% or more, which can be too high,” Rob says. Those who are inherently more conservative, for example, could aim for 85% to 90%, while those who are a bit more tolerant of risk may target 75% to 85%.
“Your probability of success gives you an idea of how durable your plan might be under a range of conditions, including market highs and lows,” says Mark Celusniak, CWS®, CFP®, a senior wealth advisor with Schwab Wealth Advisory. “However, life is rarely so predictable, so it’s important to consider additional variables that are more tailored to your own life circumstances.”