Step 2: Analysis
Once information has been gathered, we determine an asset allocation based on risk tolerance. We run a simulation to determine the probability that the allocation will meet your goals. This simulation is a software program that runs 1,000 different scenarios based on the weighted average historical return and standard deviation of returns for each of the asset classes in your allocation. The program randomly chooses returns for each asset class, based on past performance and applies that, along with your inflation adjusted savings or payout to a future year. It then repeats this process for each year of your life expectancy, 1,000 times. The result is 1,000 possible future outcomes based on the past performance of the asset classes.
Some percentage of these outcomes will result in your achieving your goals. That percentage is your probability of success. If it is unacceptably low, we adjust the plan to “spend less” or “save more.”
It’s important to note that additional risk will not materially improve your probability of success — because as the expected return increases, so does the volatility of that return, resulting in more scenarios failing.