How the study worked
Ernst & Young Insurance and Actuarial Advisory Services, October 2012. The projections or other information generated using Ernst & Young’s Retirement Analytics model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The results of the Monte Carlo simulations referenced in this article may vary with each simulation and over time. A Monte Carlo analysis solving for the probability of success given a defined amount of starting assets and a specified income amount for life was performed for each scenario. The investments assumed a risk premium of 5% for equities and standard deviation of returns of 15.91%. The risk premium for bonds is assumed to be 1% and the standard deviation of returns is 8%. The bond returns assume beginning yields reflecting the current interest rate environment and a reversion over time to long-term historical averages. The mortality table used in the analysis is the Annuity 2000 mortality table with Scale G2 mortality improvements. In Scenario 1, the participant is assumed to live to life expectancy (age 90) and earn a standard net rate of return of 7%. In Scenario 2, the participant is assumed to have life expectancy and investment returns vary via Monte Carlo simulation. In Scenario 3, the participant is assumed to have life expectancy and investment returns vary via Monte Carlo simulation, while interest rates are assumed to remain at December 31, 2011 levels throughout retirement.
See how the study worked.