Financial Planning the Monte Carlo Way
This Bankrate article discussed, in great depth, why and how Monte Carlo simulation should be applied in retirement planning.
In a nutshell, Monte Carlo simulation is far better than simple calculations used in most personal finance software and online calculators. Unlike simple calculations, which outputs a definite Yes-on-No answer based on assumptions, Monte Carlo method allows you to factor in the variability of your assumptions (for example, you assume stock market can turn in 9% profit every year in the long run; this does not mean for any given year stock market will have an exact 9% return, it can be anywhere between -50% to 50%), and calculate the success probability of your plan.
The article also pointed out two important facts:
1) Monte Carlo is not infallible. If unrealistic assumptions are made, Monte Carlo output can be meaningless.
2) The first few years of the retirement is critical. A row of losses can greatly undermine the survivability of a retirement plan.
In case you are interested, you might find the Monte Carlo simulation to my retirement planning in one of my previous posts "Is $1,000,000 Enough?"
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