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Probability Of Meeting Retirement Goal

Recall, from the blog post How Much Do We Need To Retire, that the retirement goal was at least 10 times our pre-retirement income in an investment account. We calculated that if we put 10% of our annual income into an investment every year with a 4% return above inflation it would take 40 years and with a 6% return above inflation it would take 30 years to achieve this goal. In the strategically allocated portfolio we targeted a 8.99% return with an 9.16% standard deviation. The inflation rate over this period of time was 4.02% giving an inflation adjusted return of 4.97%.

After 40 years the average portfolio value is 11.99 times the pre-retirement income with a standard deviation of 3.01. The portfolio having a value below 10 times the pre-retirement income is 0.66 standard deviations below the average. The probability of the portfolio being below this is around 25%.

Below is a table showing how the portfolio value changes over the years as a multiple of pre-retirement income as well as the probability of meeting the 10 times pre-retirement income goal:



The information presented here is the opinion of the author and may quickly become outdated and is subject to change without notice.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 ProFolio model portfolio results presented here are based on simulated or hypothetical performance. Unlike an actual performance record, simulated results do not represent actual trading and there is no market risk involved in the results. The simulated trades use historical data and therefore the trading algorithms are designed with the benefit of hindsight. In a simulated performance record it may be difficult, if not impossible, to account for all factors which might affect an actual performance record. Additionally, any account that ProFolio manages will invest during periods with different economic conditions than those under which the trading programs were developed. There is no representation being made that any account will perform as the hypothetical results indicate. In fact, there are often sharp differences between hypothetical results and actual returns subsequently achieved. Due to the benefit of hindsight, hypothetical performance almost invariably will show attractive returns, while actual results going forward may not be as attractive. ​

The algorithm that created the trading signals for each of the portfolios used Exchange Traded Fund (ETF) historical data where possible. This ETF data had a limited history. To gain additional data history, the actual asset or index data was pre-pended to the ETF data. When this occurred, ETF expenses were subtracted from the asset or index data. Where asset or index data was not available, other correlated data, adjusted for expenses, was used. Model portfolio results include interest and dividends, but subtract ProFolio's management fee (0.5%) and third-party brokerage custody/trading fee (0.25%). Real return is inflation adjusted. Higher returns generally come with higher risks. Model portfolio risk characteristics include maximum drawdown and volatility. Maximum drawdown is the portfolio's peak to trough prior to hitting a new peak and is a measure of downside risk. Volatility, or standard deviation, is a measure of the portfolio's price fluctuations both positive and negative. Sharpe ratio is a measure of return for a given risk. Sharpe ratio = (portfolio return - risk free return)/SQRT(portfolio return variance - risk free return variance). Where the risk free asset is the 90-day T-bill and the variance is the square of the standard deviation (or volatility). Tactical portfolios utilize cash or cash equivalents for risk management.

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.

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