FAQ: What Does the Success Rate Percentage Mean?

The Success Rate Analysis employs a deterministic "historical casting" approach, using actual historical stock returns, bond returns, and inflation rates to simulate retirement outcomes. Here’s a breakdown:

How It Works

  1. Scenarios Based on Historical Events:
    • The lower paths represent challenging economic periods, such as:
      • The Great Depression (1929).
      • The high-inflation era of the 1970s.
    • The higher paths reflect favorable periods, like:
      • The 1990s tech boom, characterized by strong returns.
  2. Sequence of Returns Risk:
    • Early retirement years carry heightened risk because portfolio drawdowns during poor market performance can significantly impact long-term sustainability.
    • For example, retiring during an equivalent of the Great Depression could lead to rapid portfolio depletion, necessitating spending adjustments.
  3. Impact of Government Benefits:
    • Once benefits like CPP (Canada Pension Plan), OAS (Old Age Security), and pensions kick in, they reduce reliance on portfolio withdrawals, mitigating risk.
  4. Paths of Retirement:
    • Lower Lines: Represent the worst-case scenarios (e.g., severe market crashes or high inflation).
    • Middle Line (50th Percentile): Median outcomes, a balanced expectation of returns.
    • Higher Lines: Represent best-case scenarios (e.g., strong market growth).

Interpreting the Results

  1. Monitoring and Adjustments:
    • Low Paths: May require reduced spending to preserve the portfolio and avoid depletion.
    • Middle Paths: Indicate stable outcomes, suggesting spending aligns well with portfolio sustainability.
    • High Paths: May allow for increased discretionary spending or gifting during retirement.
  2. Annual Review:
    • Each year, returns and inflation outcomes narrow possible future scenarios, helping refine the plan.