Ask Terry Questions Monte Carlo modeling

Monte Carlo modeling

By Terry Savage on November 25, 2023 | Financial Planning / Retirement

I was listening to you on WGN today (11.22.23). You were criticizing the Monte Carlo modeling analysis. Your point was that if your financial planner is computing a 94% success rate, what happens if the 6% scenario actually happens? If 94% is not good enough, what is?

Terry Says

I was talking about 90% — and again, when your advisor runs a Monte Carlo scenario, the results depend on the input into the model. Even major mutual fund companies create different Monte Carlo investment and withdrawal scenarios, using the same historic returns.

I was just saying that you don’t want to run out of money in your later years! Well, that is typically solved by Social Security, which not only promises to pay for your entire lifetime, but promises to sort of keep up with inflation! (OK, I know that’s also a bit of insecurity!)

So that’s why you want to have more money outside of Social Security to either generate income or use for principal. Just saying that I wouldn’t sleep well with a 10% chance of running out of money when I’m too old to do anything about it.

If you’re using an advisor with Monte Carlo planning, ask for the investing/withdrawal scenario that give you a 100% chance of not running out of money!



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