Definition
Monte Carlo simulation generates thousands of hypothetical future return scenarios to estimate the probability of achieving financial goals. Unlike deterministic projections (using average returns), Monte Carlo reveals the full range of outcomes and the probability of success. It is the gold standard for retirement planning, capturing sequence-of-returns risk that average-return models miss.
lightbulb Example
Running 10,000 simulations of a $1M retirement portfolio with 5% annual withdrawals: 85% probability the portfolio lasts 30 years with 60/40 allocation, dropping to 70% at 6% withdrawal rate. This reveals the "safe" withdrawal rate boundary.
verified_user Key Points
- Models thousands of potential future outcomes
- Reveals probability of achieving financial goals
- Captures sequence-of-returns risk
- Gold standard for retirement planning