Don't Bet Your Retirement on Monte Carlo Models
They measure market risk but don’t eliminate it, and they don't consider all the twists and turns life can take. Instead, build a plan to create a stable income throughout your retirement, no matter what.


When you sit down with a traditional financial adviser to plan your retirement you will provide her with the spending budget you have in mind. The adviser will adjust that amount for inflation and after running the numbers through a “black box” model, will predict how many years your retirement savings — typically made up of cash, stocks and bonds — will last.
The model to make this prediction is called “stochastic” — a fancy way to describe what is a typical Monte Carlo simulation model.
What you should know about this modeling method
The problem is that it provides you with probabilities, not certainties — which means your “planning” is much like playing a roulette wheel or any of the other casino games. The stochastic model will examine many scenarios for the coming years. It will factor in historic stock market returns and volatility, and even the volatility of inflation, to measure your savings balance against your possible life spans.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The probabilities display on a computer screen as squiggly lines to show the value of your savings. As you test against increasing ages, the number of lines that hit zero increase, indicating a greater chance that your money will run out before you do. This all translates into a prediction along the lines of, “With your budget and with expected inflation, you have a 90% chance your money will last to age 90 if markets in the future perform like markets in the past.”
It is easy to discern the lack of precision. But if you don’t like the prediction, you don’t have many options. While you can increase the percentage of bonds or cash to the investment mix to reduce volatility, that also lowers your average expected return. Another alternative is to adjust your budget and lower your monthly income — and hope your savings will last longer. You may end up with a spending goal before you walk out of the office, but the process hidden in the black box is complex, and you’re still dealing with probabilities.
How to factor in personal circumstances
And the scenario I just described deals only with the income of one person, with no unexpected expenditures, and an average life span. Let’s add the questions that arise when “life happens.”
- Will your finances support your spouse after your death?
- How much inheritance do you want to leave to your kids?
- Where will the money come from for late-in-retirement medical and caregiver expenses that Medicare doesn’t cover?
- What if your house needs expensive repairs? Or your kids or grandkids need a loan?
- And what if market volatility means your savings took a hit the same month you had those unexpected expenses?
The alternative is Income Allocation
Income Allocation focuses on providing income that lasts a lifetime, instead of predicting the date your savings will run out.
The addition of annuity payments to the dividends and interest your portfolio generates guarantees income for life and smooths out the volatility that hangs like a dark cloud over other plans. That makes your planning much simpler, because you no longer must be totally dependent on the stock and bond markets.
Deterministic vs. Monte Carlo planning
If you don’t want to trust your financial future to the casino, Income Allocation offers a plan that is much more predictable. An Income Allocation plan will continue to include stocks and bonds. Notably, annuity payments do not eliminate all risk, but they make the risk more manageable. My advice is to depend on income annuities for no more than 30% to 35% of your portfolio.
Income Allocation also makes it easier to prepare.
As you design a plan for income, you select your view of the stock market (how much risk are you comfortable with?). Then you test the results, creating the levels of income and legacy to your heirs that works for you. If you don’t like the results, you can revise your assumptions.
As you build an income allocation plan for you and your family, you will consider how your retirement income will look under three different results: A market that averages annual growth of 4%, 6% or 8%.
And whatever date your plan takes effect, you can return for adjustments later on.
Planning for likely circumstances
With Income Allocation, you can create scenarios and make changes until you are satisfied with the results. The calculations are similarly simple when you add the variables of support for spouse, late-in-life health concerns and financial legacy for kids. Here are a few examples:
- You and your spouse can each have your own annuity payments, or you can ensure that your annuity payments continue to pay out to your spouse if you pass first.
- You can create income that will kick in when you or your spouse reach a certain age — usually 85 — to help pay for medical and other costs not covered by government programs. It’s done with a deferred income annuity.
- You can test what a large planned-for — or even an unexpected expenditure — might do to your income.
Where does the market risk go?
Admittedly the legacy you leave your kids or grandkids might be lower earlier in retirement when you employ an Income Allocation plan. That’s because your plan protects your retirement income — for life — in the form of annuity payments, which reduce your risks against long-term poor market performance. But it comes with a trade-off. In this case it will be the amount you pass along to your heirs early in retirement.
My view is that heirs should welcome that trade-off. If your Monte Carlo scenario or just poor planning leaves them on the hook for your income when your savings run out, they will appreciate your smarter lifetime planning. Although there’s a chance you may be passing along a smaller legacy to the kids, Income Allocation allows you to maintain your independence as long as possible.
Questions? Visit Go2Income for more ideas about how you can increase your retirement income and feel free to contact me at Ask Jerry with questions.
Related Content
- How to Keep More Money in Retirement: Diversification That Minimizes Taxation
- 3 Great Reasons Why You Should Start Saving Early
- This Isn't (or, at Least, Shouldn't Be) Your Father's Retirement Plan
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Jerry Golden is the founder and CEO of Golden Retirement Advisors Inc. He specializes in helping consumers create retirement plans that provide income that cannot be outlived. Find out more at Go2income.com, where consumers can explore all types of income annuity options, anonymously and at no cost.
-
I’m burned out at work, but I dread retirement boredom and loneliness. Now what?
We asked the experts what to do when you're stuck on the fence.
-
Fewer Agents, Fewer Audits: How IRS Staff Cuts Are Changing Enforcement
Significant reductions in the IRS workforce appear to be increasing the number of 'no change' audit closures. The shift could potentially increase the overall tax gap — the difference between taxes that should have been paid and those that were.
-
Fewer Agents, Fewer Audits: How IRS Staff Cuts Are Changing Enforcement
Significant reductions in the IRS workforce appear to be increasing the number of 'no change' audit closures. The shift could potentially increase the overall tax gap — the difference between taxes that should have been paid and those that were.
-
What if You Could Increase Your Retirement Income by 50% to 75%? Here's How
Combining IRA investments, lifetime income annuities and a HECM into one plan could significantly increase your retirement income and liquid savings compared to traditional planning.
-
Here's Why You Shouldn't Do an Estate Plan Without a Financial Planner
Estate planning isn't just about distributing assets. Working with a financial adviser can ensure you've considered the big picture — and the finer details.
-
Trump Tariffs and Taxes: Waiting to See What Happens Is Not a Strategy
Like presidents, tariffs come and go. Policy changes also shift about every two years with the election cycle. If you're paralyzed by uncertainty, you could be missing opportunities to benefit your financial future.
-
Is a Family Office Right for You? The Multimillion-Dollar Question
As ultra-high-net-worth individuals increase in number, many are turning to family offices to manage their complex finances. Here's how family offices work, courtesy of a finance professional.
-
If You're Ignoring Private Markets, You're Missing Most of the Action
Private markets are becoming increasingly essential for all investors, not just institutions, and they are now more easily accessible thanks to innovative investment structures.
-
Three Ways Women Can Keep Caregiving From Draining Them Financially
Many women care for older relatives. While commendable, it could put their retirement at risk … unless they find a way to prioritize themselves.
-
I'm a Financial Professional: This Is the Roth Conversion Mistake Too Many People Make
Converting your traditional IRA to a Roth can be a fantastic tax-saving move, but you've got to be smart about two things: how much and when.