Monte Carlo simulation: reading the odds of a retirement plan
Why an average return is not enough
An average 5% a year does not mean 5% every year. With the same average, a big fall early in retirement while you are withdrawing hurts far more than one late in retirement. This is sequence-of-returns risk.
A calculation using only the average gives a smooth line and hides that risk.
How the simulation works
You set an expected return and volatility (standard deviation). The program draws random numbers to create many possible market paths, and runs the saving, retiring and withdrawing process on each one.
It then counts the share of paths where savings last to the target age. That share is the success rate; you can also look at weaker outcomes, such as the worst 10%.
Reading a success rate
- It is not a forecast. It only reflects your assumptions; change them and the result changes.
- A common approach is to aim for a fairly high success rate and add flexibility, such as spending a little less when markets are poor.
- Compare it with the simple 25× rule to see what volatility and sequence risk add.
Monte Carlo in the Retirement Planner
PRO in the Retirement Planner includes a Monte Carlo simulation with your own return and volatility assumptions, and lets you compare plans side by side. All calculations run in your browser and your financial data is not uploaded.
Try it in the Retirement PlannerFree to use. Your data stays in your browser and no sign-up is needed.
FAQ
Is Monte Carlo simulation accurate?
It is not a prediction. The result depends on the return and volatility you enter and shows how robust a plan is under those assumptions.
What success rate is enough?
There is no fixed standard. Many people aim high and also keep flexibility to cut spending when markets are poor.
Is my data uploaded?
No. The Retirement Planner calculates in your browser and keeps data on your device.
Keep reading
- How much do I need to retire? Annual spending × 25, minus pensionsEstimate the nest egg you need with annual spending × 25 (the 4% rule), then adjust for inflation and pensions. With a worked example you can check yourself, and common blind spots.
- What is the 4% rule? Origin, assumptions and limitsWhere the 4% rule comes from (Bengen 1994, the Trinity study), what it assumes, and why longer or more cautious retirements often use a lower withdrawal rate.
This page is general educational information and a description of calculation methods. It is not investment, tax or retirement advice and guarantees no outcome. Check official pension and tax rules and talk to a qualified professional for your situation.