Updating My Wealth Ratios - Q3 2006

I just met with my financial advisor to do a Monte Carlo analysis of possible retirement scenarios. Based on retiring with a Savings Ratio of 16, there was a 35% chance of outliving our retirement savings. With a Savings Ratio of 20, there was a 16% chance of outliving our retirement savings. Therefore, I am revising my Savings Ratio from 16 to 20, based on this analysis.

While I did expect to have a higher savings ratio than 12 due to my goal of retiring no later than 55, it was surprising that it was high as 20. There a couple of reasons for this. First I asked for an analysis of retiring in my late 40’s. Second, I used a conservative real rate of return at 2.5%. In my earlier posts, the assumptions were retiring at 55, with real rate of returns at 5%.

Given my conservative assumptions (2.5% real return and retiring before 50), I am comfortable with a Savings Ratio of 20. My next step is to have my advisor do an analysis with a 5% real rate of return assumption. I expect that the Monte Carlo analysis with this assumption will yield a 5% or less chance of outliving my retirement savings.

I have also calculated the other ratios as of the end of September. There is only one minor change, the Current Savings Ratio increasing to 14.6 from 14.3. My debt ratio and income ratio remained the same.

This is not financial advice. Please consult a professional advisor.

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