How Monte Carlo Analysis Can Calm Your Fears About Running Out of Money in Retirement

Running different scenarios through this forecasting model can help you make smarter decisions both before and after retirement.

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You've worked hard your whole life to earn and plan for your retirement years, so it's only natural to worry if you're going to have enough money to live comfortably after you stop working. The key is knowing how to calm your fears or to make the proper adjustments to alleviate them.

One of the keys is understanding that financial stability in retirement isn’t the product of pure chance. There are steps you can take to maximize your chances of success. Monte Carlo Analysis, for example. What’s that, you say? Read on.

What is a Monte Carlo Analysis and How Does It Apply to Retirement?

Named for the gambling center in Monaco, a Monte Carlo Analysis is essentially a forecasting model that takes as many variables into consideration as possible, then runs repeated simulations to determine how likely it is for this or that outcome to result from a given enterprise.

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In terms of your retirement, a Monte Carlo Analysis checks whatever givens are present in your financial situation, then makes projections by taking as many market probabilities into account as possible. It also assesses the likelihood that you will achieve your financial goals. Typically, these probabilities include things like interest rates, years until retirement, spending habits and the diversity of your investment portfolio. The result is a representation of your most and least likely outcomes.

Pros and Cons of the Monte Carlo Retirement Analysis

The Monte Carlo Analysis is far from a perfect tool. Simply put, it cannot possibly factor in all of the variables that may arise during market cycles over your lifetime. No one knows where the market is headed tomorrow, next month, or next year, not even Warren Buffett, or what personal setbacks and expenses may arise for you. However, if used correctly as a guide that sets up parameters for your decision making, Monte Carlo can help you make smarter decisions.

Real Life Example

Let’s take a very basic example* that I ran using MoneyGuidePro (the planning software I use with clients of my firm).

A man retires at age 65 with $2 million saved, half in an IRA and half after tax invested 60/40 in stocks/bonds. He’s projected to live to age 91, and he needs $80,000 per year after tax (in addition to his Social Security) to live the life he wants (basic living needs, travel, golf spending time with family).

Running a Monte Carlo Analysis tells us he has a 67% chance to fulfill his main goal, which is making it to 91 without running out of money.

Now let’s say he has a major medical issue that costs him $250,000 in 2018. That drops his chances for success down to 51%. So, what can he do to increase his chance of not running out of money?

Making the Necessary Adjustments

Unfortunately, when it comes to making adjustments in retirement, we only have a few viable options. These adjustments typically consist of one or more of the following:

  1. Withdraw less money from your nest egg and reduce your standard of living. The easiest thing to do is to take out less money per year and live off less. If you take out, say, $8,000 less per year, it would increase your chances for success back to the original range. We can then re-evaluate in a year or two to see how your plan has recovered.
  2. Work part-time to replace your lost assets. If you don’t want to change your lifestyle, you could take out less and work part time to make up for the difference (this may not be a possibility for many people).
  3. Change your asset allocation (keeping withdrawals the same). This sounds good in theory but, taking too much risk isn’t a great idea. If you ratchet up the risk to say 90/10, it only gets you to a 61% chance of meeting your goals while fully exposing you to the market volatility. And, just FYI, taking too little risk is an even worse idea: If you move from a 60/40 portfolio to a more conservative 20/80 mix you are almost assuring yourself you will run out of money as your chance of success drops to a mere 4%.

Awareness and constructive action are the keys to calming your fears about retirement. Used properly, the Monte Carlo Analysis is an excellent tool for assessing your most likely outcomes and indicating when you need to make meaningful changes. And when/if this happens, accept the findings and make the necessary adjustments.

*Disclaimer: This example is based on varied assumptions built in and is intended for illustrative purposes only. This example is not indicative of future performance, nor does it make any claims to predict outcomes for any individual investor.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Paul V. Sydlansky, CFP
Founder, Lake Road Advisors, LLC

Paul Sydlansky, founder of Lake Road Advisors LLC, has worked in the financial services industry for over 20 years. Prior to founding Lake Road Advisors, Paul worked as relationship manager for a Registered Investment Adviser. Previously, Paul worked at Morgan Stanley in New York City for 13 years. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network (XYPN). In 2018 he was named to Investopedia's Top 100 Financial Advisors list.