Understanding Probability Gives Confidence

Nothing is definite, the best thought out plans may falter, but you need a plan and you need confidence in the plan. Understanding the probability of events leads to confidence.

What is the probability you will last and what is the probability your money will be there when you need it?

Whether you live 25 years after retirement is independent of whether your money will last 25 years after retirement but they both matter to you and are only important if they both happen together. Since the probabilities are independent they multiply together. If the probability of living 25 years after retirement is 25% and the probability of the money in an investment account lasting 25 years is 25% then probability of them both occurring is (0.25)X(0.25) = 0.0625 or 6.25% which is one chance in 16. How confident would you be with a one in 16 chance of running out of money? This may not leave a lot of confidence for most people.

How confident would you be with a 1% chance (or one in 100) of running out of money in retirement? By targeting a lifespan of 30 years after retiring we lower the probability of living past the target to 10%. Additionally, targeting a 10% chance of our retirement portfolio running out in 30 years leaves a one chance in 100 of running out of money in retirement. (0.1)X(0.1) = 0.01 or 1%. A 99 out of 100 chance of success would leave the majority of people with a lot of confidence.

 

Disclosure:

The information presented here is the opinion of the author and may quickly become outdated and is subject to change without notice. All material presented in this article are compiled from sources believed to be reliable, however accuracy cannot be guaranteed. No person should make an investment decision in reliance on the information presented here.

The information presented here is distributed for education purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or participate in any particular trading strategy.

Performance data showing past performance results is no guarantee of future returns.

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