Monte Carlo Simulation
This Monte Carlo simulation tool provides a means to test long term expected portfolio growth and portfolio survival based on withdrawals,
e.g., testing whether the portfolio can sustain the planned withdrawals required for retirement or by an endowment fund.
The following simulation models are supported for portfolio returns:
- Historical Returns - Simulate future returns by randomly selecting the returns for each year based on available historical returns
- Statistical Returns - Simulate future returns based on the mean, volatility and correlations of portfolios assets
- Forecasted Returns - Simulate future returns based on any forecasted mean and standard deviation of assets
- Parameterized Returns - Simulate future returns based on the specified statistical distribution
You can choose from several different withdrawal models including:
Fixed annual withdrawal or contribution - Apply a fixed annual withdrawal or contribution.
Yearly inflation adjustments are by default done for the specified withdrawal or contribution amount based on the selected model.
Fixed annual percentage - Withdraw a fixed percentage of the portfolio balance annually.
This model ensures that the portfolio never runs out, but the annual spending amount varies based on the portfolio growth.
The percentage based withdrawal can be smoothed by using the rolling portfolio average or a geometric spending rule.
Life expectancy based annual withdrawal - This model withdraws a variable percentage of the portfolio
balance based on life expectancy. This is the RMD approach where the withdrawal percentage is 1 / Life Expectancy.
Custom sequence - Import custom sequence of periodic cashflows from a file.
To simulate multiple stages such as career and retirement with detailed cashflow goals use the Financial Goals planning tool.