When I do retirement plans for clients, one of the basic elements is to model how often a portfolio similar to theirs will last at their planned spending levels. Intuitively, most people want to hear that there is a 100% chance their plan will succeed. When I tell them it’s less than that, they often aren’t pleased. After all, who wouldn’t prefer certainty when it comes to retirement?
But here’s the reality: retirement planning is inherently uncertain. Markets don’t deliver smooth returns year after year. That’s why I use stochastic models (also known as Monte Carlo simulations) to project thousands of possible futures. Instead of pretending we know exactly what will happen, these models show a range of outcomes, from the best times to the worst times and everything in between.
The Role of Monte Carlo
Monte Carlo simulations ask a simple question: given your starting portfolio, expected returns, and spending goals, how often does your plan succeed across thousands of possible market paths?
If the model says you have a 50% probability of success, it doesn’t mean you’re doomed half the time. What it really means is that in half the cases, you don't need to change spending, and in the other half, you may need to be flexible. That’s a big difference from “failure.”
A Simple Example
Suppose we assume your portfolio will earn an average of 10% per year.
Smooth Path (straight-line growth):
Year 1: $100,000 → $110,000 (10%)
Year 2: $110,000 → $121,000 (10%)
That’s what most people picture: steady compounding.
Volatile Path (same average, bumpier ride):
Year 1: $100,000 → $70,000 (–30%)
Year 2: $70,000 → $105,000 (+50%)
Both paths average 10%, but notice the difference: one ends at $121,000, the other at only $105,000. The sequence of returns matters just as much as the average return, and that’s precisely what Monte Carlo helps illustrate.
Real Life Is More Flexible Than a Simulation
Here’s the catch: Monte Carlo assumes retirees take the same inflation-adjusted withdrawal every year, regardless of what’s happening. Real life doesn’t work that way.
Think back to 2022, when both stocks and bonds declined. A retiree might have said:
“Let’s take a less expensive vacation this year.”
“Let’s hold off a year before buying the new car.”
That’s normal human behavior: delayed gratification and substitution. Monte Carlo doesn’t account for those choices; it assumes the full withdrawal happens regardless. That’s why a model showing a 50% success rate may paint things as more dire than they’ll be in practice.
Why Not Aim for 100%?
It’s natural to want a 100% chance of success. But here’s the problem: to get there, you’d have to underspend dramatically, often leaving far more unspent than you intended. That’s a recipe for living too cautiously and missing out on experiences you could have enjoyed.
I encourage clients to think in terms of probability ranges. A plan showing a 70%+ chance of success is usually where I start feeling comfortable that the plan is sound. That level balances the confidence we want with the flexibility we know you’ll actually use.
Planning is Not a One-Time Number
There’s an important distinction here:
One-time plan, set in stone: If you never revisit your plan, you’ll want a higher success rate because you aren’t giving yourself any room to adapt.
Ongoing planning: When we update the plan every year, monitor spending, and adjust as needed, even a 50% probability can work. Retirement is a process, not a fixed forecast.
This is why our planning process is designed to be dynamic. We don’t just set the plan and walk away; we regularly check in, rerun scenarios, and adjust as life unfolds.
Guardrails and Peace of Mind
To make flexibility concrete, we often use the concept of guardrails. If markets drop too much, we might recommend temporarily trimming spending. If markets perform better than expected, we can increase it. Guardrails turn uncertainty into clear action steps, which gives clients both peace of mind and permission to enjoy life.
Think of it like cruise control with lane assist: you’re still in charge, but the system keeps you from veering too far off course.
So, Is a Coin Flip a Good Retirement Plan?
If you expect retirement to be perfectly predictable, then no, a coin flip isn’t good enough. But if you accept that retirement requires flexibility, then a “50% success rate” doesn’t mean failure at all. It means you’re planning for adaptability.
And while 100% certainty sounds comforting, the truth is that most retirees thrive with plans showing 70% or greater confidence. This provides a sufficient buffer to withstand unforeseen circumstances, while also allowing you to enjoy the retirement you've diligently earned.
The real risk isn’t volatility. It’s rigidity.
Retirement isn’t about chasing a single number. It’s about building a plan that can flex, adapt, and support the life you want, no matter what sequence of returns shows up. If you need help developing a plan or reviewing one you’ve already started, get in touch.