{"id":1227,"date":"2014-02-07T01:19:26","date_gmt":"2014-02-07T06:19:26","guid":{"rendered":"http:\/\/www.holypotato.net\/?p=1227"},"modified":"2014-06-07T13:07:47","modified_gmt":"2014-06-07T18:07:47","slug":"the-cone-of-probability","status":"publish","type":"post","link":"https:\/\/www.holypotato.net\/?p=1227","title":{"rendered":"The Cone of Probability"},"content":{"rendered":"

[Update: this post appears in the Carnival of Wealth, Dollars to Dollars Edition<\/a>]<\/p>\n

Here is how many people plan for retirement (and many similar activities that involve projections): come up with reasonable estimates of the relevant parameters. Plug it into an online calculator or spreadsheet to do the math. Have a cookie.<\/p>\n

Yet you really can’t just say that the average investment return is 6%, your average spending needs are $40k\/yr and inflation will hit 2%, plug that into a spreadsheet, and call your financial planning exercise completed. That might be your expected, most likely outcome and an excellent start. You can plot it for a nice, smooth exponential growth trajectory like this:<\/p>\n

<\/p>\n

A very comforting graph: continually saving money, making steady returns, you move smoothly towards your retirement goal. While your future might have a good chance of looking something <\/em>like that, it’s highly unlikely to be precisely <\/em>like that. There’s a whole range of possible outcomes. So we don’t want to just plot the course that’s going to get us there. Take a few minutes and add a “95%1<\/sup> best case” and “95% worst case” projection. How would those scenarios affect your plans?
\n