Growth Rate in Drawdown

westv

bostonerimus wrote: »

If the statistics of the next 30 years of investment results are significantly different from the last 100 or 150 then today's Monte Carlo simulations won't be applicable to today's retiree.

I'm a bit confused by that statement. My understanding of Monte Carlo simulations is that they produce are a large number of random outcomes ranging from investment nirvana to global economic collapse with all destinations in between. The chances of the next 30 or 40 years not being in that range somewhere must but be pretty unlikely.

AlanP_2

Deleted_User wrote: »

Yes, it’s all a bit strange. They don’t account for inflation. Indeed all of their portfolios, particularly the cautious ones, would be devastated if inflation were to increase. And “balanced” isn’t anywhere near 60/40. Also like how they define “wealthy”. Anyone >250k? Really? Are they in the right decade?

According to Royal London in May 2018 the average UK pension pot was £35k so classifying >£250k as "wealthy" is reasonable and suggests they are in the right decade.

https://www.express.co.uk/finance/retirement/960313/pension-savings-million-pounds-retirement

I think we sometimes forget that this forum is a separate "bubble" frequented by a group of regulars who are interested because they have significant sums to worry about and infrequent visitors who need a quick "helping hand" when they realise they don't.

It is far removed from the real lives being experienced by a large part of the population.

bostonerimus

westv wrote: »

I'm a bit confused by that statement. My understanding of Monte Carlo simulations is that they produce are a large number of random outcomes ranging from investment nirvana to global economic collapse with all destinations in between. The chances of the next 30 or 40 years not being in that range somewhere must but be pretty unlikely.

The sets of investment returns are usually based on historical statistics. So maybe we want to have the same 10, 20 or 30 year mean equity and bond returns within some standard deviation and you can get that from infinitely different combinations of annual returns. The combinations might be random, but weighted by something like a gaussian distribution so that outcomes that reflect the historical data are more likely.

[Deleted User]

AlanP wrote: »

According to Royal London in May 2018 the average UK pension pot was £35k so classifying >£250k as "wealthy" is reasonable and suggests they are in the right decade.

https://www.express.co.uk/finance/retirement/960313/pension-savings-million-pounds-retirement

I think we sometimes forget that this forum is a separate "bubble" frequented by a group of regulars who are interested because they have significant sums to worry about and infrequent visitors who need a quick "helping hand" when they realise they don't.

It is far removed from the real lives being experienced by a large part of the population.

The “average” pot size presumably counts newly graduated youngsters and people with a large DB pension and a small “pot” on the side.

In any case, how much sustainable annual income will 250k generate? Let’s say 10k. Not exactly “wealthy”.

[Deleted User]

westv wrote: »

I'm a bit confused by that statement. My understanding of Monte Carlo simulations is that they produce are a large number of random outcomes ranging from investment nirvana to global economic collapse with all destinations in between. The chances of the next 30 or 40 years not being in that range somewhere must but be pretty unlikely.

They randomly pick from an actual dataset. You have to start from a plausible distribution and that’s historic data we have for the max of 200 years. So, the outcomes are not completely random; it’s not like you are randomly selecting in the interval of plus and minus a few billion percent.

bostonerimus

Deleted_User wrote: »

They randomly pick from an actual dataset. You have to start from a plausible distribution and that’s historic data we have for the max of 200 years. So, the outcomes are not completely random; it’s not like you are randomly selecting in the interval of plus and minus a few billion percent.

You can use the historical data to construct an infinite number of data sets with similar statistics. The point is that if future markets are a few standard deviations different from past markets then the projections will not be good. This all comes down to predicting the future using data collected in the past for a process that is not easy to model and is subject to influences that are even harder to model. Wasn't it nice when you could leave all this up to insurance companies and just buy an annuity.

[Deleted User]

bostonerimus wrote: »

You can use the historical data to construct an infinite number of data sets with similar statistics. The point is that if future markets are a few standard deviations different from past markets then the projections will not be good. This all comes down to predicting the future using data collected in the past for a process that is not easy to model and is subject to influences that are even harder to model. Wasn't it nice when you could leave all this up to insurance companies and just buy an annuity.

It was simpler but not as interesting

westv

Deleted_User wrote: »

They randomly pick from an actual dataset. You have to start from a plausible distribution and that’s historic data we have for the max of 200 years. So, the outcomes are not completely random; it’s not like you are randomly selecting in the interval of plus and minus a few billion percent.

Surely that would only matter if markets fell lower or rose higher in any one year than they have ever done?

bostonerimus

Deleted_User wrote: »

It was simpler but not as interesting

I don't think most people want retirement planning to be interesting.....simple and guaranteed would be ideal. That's why my plan crystallized around ways to avoid having to rely on the variable returns of the stock market. Now if I knew for sure that my return would be somewhere in a gaussian distribution with a known mean and standard deviation I'd be a lot more sanguine about the markets, but as the mean and sigma also have uncertainty I decided to emphasize other retirement income sources and I was lucky enough to be able to afford to do that....many people can't and so have to take on more risk. This is why I'd like to see annuities become more affordable so that people could be persuaded to annuitize some of their pension pot to provide a good income floor along with the state pension.

shinytop

I would be concerned if I were largely reliant on a DC pention to fund my retirement. Fortunately I'm not and I count myself lucky compared to some in that respect. I think I've now convinced myself that, within a reasonable range of outcomes, I'll be OK. My biggest risk will be either not spending enough or paying too much tax.