The Difference Between an Illustration and a Plan
Many people have seen a retirement plan that ends with a number like “90% probability of success.”At that point, many people have a similar reaction. The number looks good, but it doesn’t fully answer the question they care about most:
“What would I actually do if things don’t go according to plan?”
It’s not just about whether the plan works most of the time, it’s about what happens when it doesn’t.
The most common financial planning software options operate similarly. You enter some data on assets, income, and expenses, the tool runs a series of simulated market returns, and the tool gives you a probability of “success”. There are reports you can run that will show cash flow and withdrawals and estimate taxes under static assumptions. These can be helpful to know if your retirement goals are achievable, but this is an illustration, not a plan.
An illustration is a projection with no action. It shows what the possibilities are, but not how to react and adjust. If the tool shows a 90% probability of success, a natural next question is, “What about the 10%?” How do you know when you’re in a 10th percentile scenario? What do you do about it? An illustration doesn’t answer those questions, but a plan does. A plan offers actions and decision points. For example:
If the portfolio grows beyond a certain level, spending might increase.
If markets perform poorly for several years, spending might temporarily decrease.
If certain thresholds are reached, adjustments can be made before the situation becomes severe.
Every plan changes over time because the future is unknowable. There are always surprises, good and bad, and the plan has to be updated regularly as things change. It is good to know the possibilities, but without knowing when adjustments might be required and what they might be can leave some anxiety unaddressed. Having a true plan can provide more confidence than an illustration.
This content is for educational purposes only and does not constitute investment advice. Past performance is not indicative of future results.