Monte Carlo Retirement Planning

Retirement planning is all about managing the unknowns. Nobody can be certain of how their investments will perform, how well they’ll be able to stick to their savings plan, or how much they’ll really need to spend in retirement. Yet, each of these variables must be estimated in order to build a solid retirement plan. To make matters worse, investment results are anything but uniform from year to year, and large variations in annual portfolio returns can wreak havoc on even the best retirement plans. Yet, despite all this, many seasoned financial planners are still using archaic tools that don’t account for the uncertainty and volatility that’s inherent in all long-term planning.

Fortunately, thanks to some powerful new retirement planning research, you are no longer constrained to those simple minded approaches. Breakthrough research has led to a new retirement planning approach called Monte Carlo Simulation. Monte Carlo retirement planning can be used to help manage the unknowns and give planners and future retirees better information about the risks and potential pitfalls hiding along the retirement road that lies ahead.

Monte Carlo Simulation is a planning technique that provides answers in the form of probabilities, or a likelihood of success. Instead of a simple yes or no, black and white answer, a Monte Carlo retirement calculator returns the percentage chance that the plan might work. A retirement plan with a 50% probability of success has the same chance of failing as it does succeeding. Odds like these that would leave most very unsettled. On the other hand, a plan with a 95% probability of success has only a one in twenty chance of failing. Now those odds would make for much sounder sleep.

Another important benefit of this powerful approach is that it allows you to easily build a “model” of your retirement and run experiments with it. Today, the best retirement plans are “stress tested” to expose the weak points and vulnerabilities. Are you worried about what the expenses of long-term care might do to your retirement plan? You can model them in your plan. Are you concerned about the effects of a 20% stock market crash, five years into your retirement? Simulate it. The possibilities are endless for modeling or simulating expected and unexpected situations that could impact your plan. These tools put you in the driver’s seat so risk and uncertainty can be kept in check.

You’ll be able to use the insights you get from stress testing to make better decisions about how best to protect yourself down the road. Perhaps a long-term care insurance policy is called for, or maybe the simulation will show you that your plan is robust enough to weather even this storm, saving the premiums for a fine European cruise! Think you want to invest aggressively for the highest returns,? Perhaps seeing real numbers that clearly show the potential downside of that high risk portfolio might lead you to reevaluate your risk appetite.

Ok you’re thinking, this sounds good. Where do I start? Well, if you’re working with a financial advisor, this is certainly something you should take up with them. Ask them if they use Monte Carlo Simulation as part of their planning process. If you’re a do-it-yourselfer, you might like to try a free online Monte Carlo calculator called the flexibleRetirementPlanner that lets you run your own retirement simulations.

Either way, it’s clear that the days of leaving retirement planning to chance are over for good. Now, you have the power to manage risk and uncertainty and build a retirement plan that’s just right for you and your family.