More on Monte Carlo pitfalls:
No attempt is made to correlate a given year's inflation rate with prior years' inflation rates or with corresponding portfolio returns. Some may view this as a significant weakness of the simulation, however, the historical record indicates that correlations in this area tend to be unsteady at best.
The correlation between the inflation rate and portfolio returns is not modeled.
Another pitfall:
The withdrawal policy, or real spending policy, does not allow the simulation to account for the natural human tendency to make adjustments when things aren't going as well as expected, or when things are going better than planned.
A successful retirement is defined as one in which you don't run out of money and you have enough to pay your expenses. In very general and rough terms, most retirement planners would consider a probability of success that was below 80% to be a failed plan.
Sometimes portfolio survival is prioritized above annual spending needs. In such a case, the programs drive to preserve the portfolio leads to retirees starving!
One thing to keep in mind is that these balances represent the average balance for all simulation runs. This can be a bit misleading because half the time the retiree would have a smaller balance, and half the time they might have a larger balance.
Again, keep in mind that the balance and spending percentage amounts are averages and don’t represent any real or concrete data.
Can you tell that I do not like Monte Carlo simulations for practical retirement withdrawal strategies? Forget those colorful graphics - they are "near" meaningless.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.