Probability of success is the headline number most planning tools report, and it is easy to over-read. It is not the chance that your retirement works. It is the chance that a model of your retirement worked, inside a model of markets, under a fixed set of assumptions.
It is best used differentially. If switching from a rigid withdrawal rule to guardrails moves success from 84% to 96% under identical assumptions, that difference is informative even though neither absolute number is a forecast.
A high number can also hide the shape of the failures. Two plans can both report 90% success while one fails gently at age 92 and the other fails catastrophically at 74. The distribution of when and how the failures occur matters more than the single percentage.
Chasing a very high probability has its own cost, and it is usually paid in years of your life spent working or in spending you deferred and never took. A plan at 99% is not obviously better than one at 92% if the difference is three extra years at a desk.
Research on this
See also
- Ruin rate — The share of runs in which a plan exhausts its portfolio before the horizon ends. A 5% ruin rate means the money ran out in one simulated run in twenty.
- Monte Carlo simulation — Running a plan through thousands of randomly generated market sequences to report a distribution of outcomes, instead of one path from an average return.
- Sequence of returns risk — The risk that the order in which investment returns arrive damages a plan, even when the average return is unchanged. It matters most when money is being withdrawn.