Key takeaways
- Change one variable at a time or you will not know which change did the work.
- Compare differences between scenarios rather than the absolute numbers. Differences survive bad assumptions.
- Most plans have one dominant variable. Find it before optimising anything else.
- A scenario that only wins under a generous return assumption has not actually won.
One variable at a time
The usual mistake is building two scenarios that differ in four ways and then wondering which one caused the gap. You cannot recover that information afterwards.
Hold everything constant, move one dial, read the difference. Then reset and move the next one.
Read the gap, not the total
Both totals in any comparison rest on the same assumed return, so if the assumption is wrong they are both wrong in the same direction. The gap between them is far more robust than either figure.
Saving an extra hundred a month adds about $113,000 here. That conclusion holds up whether the real return turns out to be 6 percent or 8. The $679,000 does not.
Find the variable doing the work
Run each dial separately and one usually dwarfs the others. For someone early in their career it is almost always the contribution rate. Closer to retirement it is often the retirement date itself, because delaying does three things at once. More contributions, more compounding, fewer years to fund.
Once you know which dial matters, you know where to spend your effort.
Test the loser as well
Before committing, run the preferred scenario again with a return a point or two lower. A choice that still wins under a pessimistic assumption is a real choice. One that only wins under a generous one is a bet.
Sources
- Scenario figures are the future value of an annuity computed at the stated assumptions, differing in exactly one variable each.
Open Forecast. Change one lever at a time and watch the split and projection respond.
Open in Capital Allocation →