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Most people I meet as they approach retirement think they’re probably ready.
They’ve saved consistently, avoided major mistakes, and always lived within their means.
Thinking you’re ready to retire is a lot different than actually retiring. As reality sets in, people get nervous. And that is okay.
As we begin discussions, some of the most common questions I hear are:
• How do I know when enough is enough?
• How do we plan for all the unknowns?
• I think I’m in good shape, but the models I’ve seen feel too simple. The advisor asked me a few questions, then concluded I have a high probability of success.
That last one is usually right.
Most of the “models” people are referring to are Monte Carlo simulations. It’s the most common way advisors test a retirement plan.
It’s also where many plans fall short. Not because it is a bad test, but more because this is where the analysis stops.
Before stepping into retirement, you should feel like you’ve properly prepared. Not just look at one number and hope it holds up. You should understand what you’re walking into, what risks exist, and how your plan responds to them.
We don’t rely on a single test. We use a combination of methods to make sure your plan is actually built to hold up.
Monte Carlo simulations are a useful tool when used correctly.
They typically run hundreds or thousands of scenarios, randomizing inputs like market returns and inflation. The output is a probability score, usually referred to as your “probability of success” where success means you did not run out of money.
This gives us a sense of how sensitive your plan is to different market environments.
I like using Monte Carlo early in the process because it helps answer the main question:
Is this plan even feasible given your desired retirement date and spending?
If the probability is strong, we can move forward and start refining the plan.
If it’s not, we focus on the controllables. That usually means adjusting spending, working longer, or some combination of both.
That part is valuable. Where it falls short is what comes next.
Most people don’t think in probabilities. A 75% success rate doesn’t feel intuitive. It often turns into, “How do I get this to 100%?” which isn’t really the point.
It also doesn’t tell us when adjustments should be made or what those adjustments should look like. One advisor might be comfortable with a 60% probability, while another wants to see 85%. There’s no universal standard.
And most importantly, it doesn’t do a great job helping us determine the right tax or investment strategy.
That’s where we go deeper.
The second test we rely on is called the funded ratio. It’s a concept used by pension managers, and it changes how we think about the entire problem.
Instead of asking, “What are the odds this works?” we ask:
What do you actually need, and do your assets cover it?
We calculate the present value of all the withdrawals you’re expected to take throughout retirement, including taxes. That becomes your liability. Then we compare it to your current assets, calculating the funded ratio.
If your future withdrawals equate to $1 million in today’s dollars and your portfolio is $1.5 million, your funded ratio is 150%. You are overfunded by 50%, or $500,000.
This tends to resonate better with people because it’s easier to conceptualize. You either have enough, or you don’t. And if you have more than enough, by how much?
It also directly impacts how we structure your plan.
If you are significantly overfunded, you have flexibility. You can take on more risk if you want to, or reduce risk and protect what you’ve built more conservatively.
If you are constrained or underfunded, then I’m typically discussing the role annuities can play. For someone in that position, the risk of running out of money is high. We need to reduce this risk, and an annuity is a great tool for this.
This isn’t always the most exciting answer, but often the right one.
The funded ratio is also one of the most useful metrics when making tax decisions.
For example, Roth conversions increase your tax burden in the short term but reduce it later. The question is whether that tradeoff actually improves your overall financial position.
The best way to answer that properly is by converting those future tax savings into today’s dollars and comparing the different scenarios. Without doing that, you’re guessing.
The main limitation of the funded ratio is that it depends on the discount rate used in the calculation. A lower rate makes it harder to show a strong result. We test multiple scenarios to understand how sensitive the plan is, but like any model, it isn’t perfect.
Once the plan holds up under those two tests, we take it one step further.
We run the plan through real historical time periods, including some of the worst market environments. The 1970s. The early 2000s. The 2008 financial crisis.
This is not about predicting the future. The past won’t repeat exactly.
The goal is to answer a different question:
What would this have actually felt like?
Most people understand that markets go through difficult periods. What they don’t know is how those periods would impact their specific plan.
In many cases, the adjustments required during tough environments are smaller than people expect. It might mean reducing discretionary spending for a period of time or delaying a large expense. Not a complete lifestyle overhaul.
That tends to be a relief.
This is especially important for people who have spent their entire lives saving and being disciplined. Switching from saving to spending is often harder than expected.
Seeing that the plan holds up, even in difficult periods, gives people the confidence to move forward.
Preparing for Retirement the Right Way
Before stepping into retirement, you should feel like you’ve done more than just run a few projections.
You should understand:
In other words, you’ve prepared for the terrain ahead.
Because once you step into retirement, the goal isn’t to constantly question whether you made the right decision.
It’s to move forward with clarity and confidence, knowing your plan was built to handle what comes next.
Beau Kemp, CFP®, RMA®
Founder, Financial Advisor
Retirement brings up questions you haven't had to answer before. Let's talk through yours:
Retirement planning isn't one decision, it's dozens of small (mostly irreversible) ones: when to claim, what to convert, what to draw down first. We walk the whole route with you, one decision at a time.
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