Monte Carlo Analysis

Monte Carlo Analysis

dogs guiding each other on their future
The term Monte Carlo can create an image of fun, excitement, and wealth. A Monte Carlo analysis from a financial planning perspective is among the most critical metrics in determining success in retirement.
The term Monte Carlo can create an image of fun, excitement, and wealth. A Monte Carlo analysis from a financial planning perspective is among the most critical metrics in determining success in retirement.
dogs guiding each other on their future

If you are like other pre and current retirees, one of the most important questions you will have is, “Will I be Ok? Will I run out of money in retirement?

The problem with online retirement forecasts and other simple planning tools is, most all assume that investment growth is linear – at the same rate each year. That whatever the assumed growth rate is selected, it will happen like clockwork. 

As you know, this is not true. 

Each investment year brings its highs and lows. There have never been two years with the same performance outcome in the history of the stock, bond, and real estate markets. The idea of projecting linear growth will provide a false sense of security in retirement.

Enter Cornerstone and our use of Monte Carlo. When investors ask about the chances of running out of money in retirement, they are indirectly asking, “What is my chance of success in retirement? 90%? 75%?” 

Unlike the simple planning tools, Monte Carlo does not assume straight-line performance over the balance of your retirement. 

Instead, Monte Carlo looks back at historical returns, considers 1,000 different potential outcomes, and calculates a single number that represents your likelihood of success. Statistically, a retiree will have a high probability of success in realizing that outcome.

If you become a new client at Cornerstone, we will calculate your Monte Carlo number to benchmark your current potential outcome. We will identify coordination gaps and areas for improvement to your current plan and measure our recommendations in these areas by comparing Monte Carlo numbers during our work together. 

If we get to 80% to 90% probability of success in a plan, we consider this a solid plan. The Monte Carlo for many Cornerstone clients is 100%, due in part to changes they made due to our work together.

Monte Carlo can be fun, exciting, and represent wealth. At Cornerstone, it is also one of the most important measurements we review for your retirement picture.

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