Why No Two Retirement Models are Alike

The development of a retirement income plan is one of the most significant challenges people will face in their financial lives. And, it’s more important today than ever. (Why Retirement Income Planning is More Important Than Ever) Few people realize, however, the impact that key factors and assumptions can have on their plans.

Some factors, such as asset return and volatility, inflation assumptions, and the duration of the analysis, i.e., retirement date to life expectancy, are commonly known as having a substantial bearing.

But unfortunately, other assumptions seldom considered in planning models and tools today can also have an extensive impact on a retiree’s plan: spending behavior, taxes, timing of Social Security, and investment management expenses, to name a few.

Different Models, Different Factors

Even common factors, such as asset returns, have many nuances that are either glossed over or ignored entirely in commonly used planning tools. Some models use a deterministic or flat assumption, e.g., equities growth of 6 percent each year, historical backtesting of specific time periods, etc., while others use a stochastic methodology. Some models use historical mean and standard deviations, while others use projections. Some consider the correlations of assets, while others assume randomness with no asset correlation. And, some use a normal distribution while others use a lognormal. You get the picture.

So, let’s think about the differences in plans and models today:

  • How do we make sense of all these factors?
  • Are there other influences that we may not be aware of?
  • How do we know which has the biggest impact on a retirement analysis?

To answer those questions, we need to first be able to model each of those factors in a retirement plan.  And then, we need to have a way to compare whether one factor has a greater impact than another, and by how much.

It Comes Down to Income

JourneyGuide™ is an entirely new planning tool that uses sophisticated algorithms and computing, with the ability to consider multiple factors in a flexible architecture – all at an unprecedented speed.

More importantly, JourneyGuide gives retirees the best and most practical way to compare the impact of planning factors in terms that mean something to them: their expected income. The retiree wants to know how much spendable income (after tax and inflation) they can sustain throughout retirement.  JourneyGuide provides its results in just those terms.

See it Now

Over the coming weeks, I’ll be sharing the results of a sensitivity analysis, which will culminate in a tornado chart of the most impactful factors in retirement planning. In the meantime, you can read more about JourneyGuide here: www.journeyguideplanning.com.

DISCLAIMER: All content on the JourneyGuide blog is provided for informational purposes only. Any statements or opinions expressed throughout this website are those of JourneyGuide and are subject to change without notice. The information provided on this website is from sources JourneyGuide believes to be reliable, but the accuracy of such information cannot be guaranteed. Nothing provided on this website is intended to be personal investment advice, nor does JourneyGuide evaluate or consider the specific financial circumstances of those who read this website. Any references to securities or insurance products are for informational purposes only. Past performance is not indicative of future results.