How do Boldin’s projections and forecasts work together?
Boldin's projections account for all economic assumptions, not solely investment returns. These encompass general inflation, medical inflation, and wage growth assumptions, income, expenses, etc. as modeled under your active forecast (optimistic, average, pessimistic, and today's/future dollars).
When you choose optimistic, average, or pessimistic forecasts, the following rates are influenced: general inflation (affecting expenses and tax brackets), medical inflation (for healthcare costs), work and passive income growth (wage increases), housing appreciation, and Social Security COLA, in addition to investment returns. Additionally, it's important to note the distinction in projection methods. The dashboard uses a linear projection model, which provides more stable, smooth estimates. In contrast, downloaded reports rely on Monte Carlo probabilistic estimates, evaluating outcomes over a range of possibilities, which introduces more variability.
Monte Carlo Analysis determines your Chance of Success
A Monte Carlo simulation is a technique based on repeated statistical analysis that simulates a range of possible outcomes for an uncertain situation. Boldin's Monte Carlo infers a reasonable standard deviation associated with your rate of return based on history. Then, Boldin conducts a simulation with 1,000 iterations calculating a normal distribution curve (i.e. bell curve) of potential outcomes using that average rate of return and standard deviation to create variance. This probabilistic method inherently differs from the linear projections visible on the dashboard. The Monte Carlo approach accounts for uncertainty and variability while the dashboard's linear models offer a simplified view that assumes consistent growth.
Your Retirement Chance of Success is determined by dividing the number of iterations where funds never run out by the total number of iterations. This indicates the probability of your portfolio sustaining withdrawals and meeting your financial goals and obligations.
The Monte Carlo simulation is applied to your financial plan, integrating with monthly cash flows. These cash flows are independent of the simulation. While you may adjust cash flows or asset allocation to improve success, the simulation relies solely on your rate of return and associated standard deviation.
What you're viewing in the Overview and Retirement Chance of Success Report
Your Overview and Retirement Chance of Success Report reflect your Chance of Success based upon your active forecast (optimistic, average, pessimistic). However, discrepancies might occur between the dashboard view and downloaded reports due to differences in projection methodologies. The dashboard reflects linear projections, whereas downloaded data relies on Monte Carlo simulations.
What you're viewing in the Monte Carlo Analysis Explorer
The Monte Carlo Analysis page displays your chance of success based on the average forecast, regardless of what forecast you have active.
When utilizing the Today's Dollars forecast, which adjusts future dollar amounts based on your general inflation rate, the Monte Carlo result on the Analysis page might seem to shift under optimistic and pessimistic forecasts. This apparent change, however, merely reflects variations in inflation and not alterations to your investment return assumptions.
When "Future Dollars" is selected, the optimistic, average, and pessimistic forecasts will not show any changes. This is because all projections are based on the same average assumptions, without adjustments for inflation. To resolve discrepancies between dashboard projections and downloaded data, ensure that the selected scenario on the dashboard matches the one used for downloading reports. Additionally, recognize the methodological difference: linear vs. probabilistic models, as these inherently lead to variations.
Steps to Reconcile Dashboard and Downloaded Projections
Follow these steps to address any inconsistencies between projections:
Verify Scenario Selection: Ensure that the scenario on the dashboard matches the one used in downloaded reports (Optimistic, Average, or Pessimistic).
Understand Methodology: Remember that the dashboard uses linear projections and downloads use probabilistic Monte Carlo analysis, which accounts for variability.
Adjust Dashboard Settings: If needed, toggle between scenarios on the dashboard to align results and reflect the required forecast. By understanding these differences and aligning scenarios, you can better interpret and reconcile the data shown by Boldin.