Monte Carlo Simulations

What is the benefit?

Most retirement calculators use average returns for stocks, bonds, real estate, and other asset classes to make future projections. While this offers a useful indication as to how comfortable your retirement will be, it leaves out some important factors. The timing of positive and negative investment returns can make a significant difference.

Consider the following two scenarios starting with a retirement nest egg of $1,000,000 of which you consume $50,000 per year:

First scenario: You experience 9 years of 6% growth followed by a 'crash' year in which your investment declines 25%. After 10 years you have approximately $780,000.

Second scenario: You experience the 'crash' year first, followed by 9 years of 6% growth. After 10 years you have approximately $580,000. This number is lower because for much of the 10 years this scenario gives you a lower asset balance. The $50,000 annual consumption is therefore a higher percentage drain in this scenario compared to the first scenario.

Only a Monte Carlo Retirement Calculator provides information about how different possible outcomes can be.