Percentiles show the distribution of outcomes across Monte Carlo iterations. The 25th percentile means 75% of scenarios did better - it represents the pessimistic case. Retirement Lab displays bands from 25th to 75th percentile so you can see pessimistic, typical, and optimistic portfolio trajectories at a glance.
A percentile is a value below which a given percentage of Monte Carlo simulation outcomes fall. In retirement planning, percentiles transform thousands of individual simulation paths into interpretable bands that visualize the range of possible portfolio outcomes over time.
How It Works
After running all iterations, the simulation sorts portfolio values at each time point and extracts key percentiles:
| Percentile | Meaning | Use |
|---|---|---|
| 25th | 75% of scenarios did better | Pessimistic scenario |
| 50th (median) | Half did better, half worse | Typical outcome |
| 75th | Only 25% did better | Optimistic scenario |
The range between the 25th and 75th percentiles is the 50% confidence interval - half of all simulated scenarios fall within this band.
Why It Matters for Retirement Planning
Percentile bands provide information that a single success rate number cannot:
- Shape of failure: Does the 25th percentile portfolio deplete in year 15 or year 28? Both count as "failure" in the success rate, but the planning implications are vastly different.
- Upside potential: The 75th percentile shows how much wealth might accumulate in favorable scenarios - relevant for legacy planning or deciding whether to increase spending.
- Spending decisions: If the median outcome shows $2 million remaining but the 25th percentile shows depletion, a dynamic spending strategy that adapts to actual portfolio performance is clearly preferable to a static withdrawal.
The visual fan chart of percentile bands - widening over time as uncertainty compounds - is one of the most powerful tools for understanding retirement risk. It shows at a glance how much the range of outcomes grows as the time horizon extends.
How Retirement Lab Addresses This
Retirement Lab displays percentile bands (25th, 50th, 75th) on the portfolio fan chart for every simulation. The gap between the pessimistic and optimistic bands shows the range of outcomes your plan could face. Try it free
Frequently Asked Questions
- What percentile should I focus on for retirement planning?
- Most planners focus on the 25th percentile - the pessimistic scenario. The median (50th percentile) tells you the typical outcome, but retirement plans fail in the tails, not the middle. If your 25th percentile portfolio value stays above zero through the end of your planned retirement, your plan is in good shape.
- What is the difference between a percentile and a confidence interval?
- A percentile is a single threshold (e.g., '75% of outcomes fall above this value'). A confidence interval is a range between two percentiles (e.g., 'the 25th to 75th percentile range contains 50% of outcomes'). Retirement Lab displays both: the percentile bands show the range of outcomes, and the success rate summarizes the key threshold.