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Gambling with Monte Carlo: Simulations in Retirement

Matthew Peoples

“Ladies and gentlemen, this is your captain speaking. I’d like to welcome you aboard Retirement Airlines. We know you have a choice when you fly and we’d like to thank for choosing Retirement Air.

“The tower is telling us we’ve got some bumpy weather ahead of us….European debt down drafts are pretty strong still and we’ve got some pretty strong winds blowing out of the housing depression as well as some unemployment turbulence.

“But I want you to know, ladies and gentlemen, that I’ve put all these factors into our in-flight computer and it’s showing me that we’ve got a 90% confidence level of arriving at our destination…”


Can you say “disembark?” I’d be jumping out the window faster than you can put your seat back up and your tray table in an upright and locked position.

Computer programs commonly known as “Monte Carlo simulations” have been all the rage in the financial planning industry for the last ten or fifteen years. Using computers to run hundreds or thousands of possible scenarios based on past market history, these programs calculate the probability of a retiree making it in retirement…or not.

Most of them try to calculate a “safe rate of withdrawal (SRW)” giving the ups and downs of investment portfolios. A variety of portfolio combinations is usually simulated (all stock, all bond, some of both, etc).

What can be missed in all the sterile charts and graphs and technical sounding jargon is what is actually being measured: how likely is it you will actually run out of money. In the case of the 90% confidence level, that means the program has estimated there is a 1 in 10 chance you will be broke before you are dead.

That’s bad enough, but what these programs never measure is the absolute heartache and stress that would come with watching one’s assets dwindle down to zero.

So are Monte Carlo simulations worthless for use with investment accounts? No. Just limited.

They can certainly give you a starting point, helping you identify a safe-er place to start with your retirement income planning.

Make sure you are working with an advisor that understands how to use this complex and potentially misleading tool, that can communicate its output to your in a clear, non-jargonized manner and (most importantly) can help you manage your situation year by year.

Planning for your income in retirement is no time to count on probabilities to help you sleep well at night.

Because when the wheels go up on your journey to Retirement Land, it’s too late to get off the plane.

Byron is a Certified Financial Planner and Managing Director of the Planning Group at Argent Advisors, Inc.
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