Monte Carlo Simulation
This online 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 during the retirement years. The following simulation models are supported for portfolio returns:
- Historical Returns - Simulate future annual returns by randomly selecting the returns for each year from the database of available annual returns
- Statistical Returns - Simulate future annual returns based on the mean and standard deviation of the selected asset allocation's actual historical return
- Forecasted Returns - Simulate future annual returns based on any forecasted mean and standard deviation of asset classes
- Parameterized Returns - Simulate future annual 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.
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.
Monte Carlo Simulation Results
Monte Carlo simulation results for 10000 portfolios with $1,000,000 initial portfolio balance using available asset class data from 1972 to 2016. The historical return for the selected allocation from 1972 to 2016 was 10.14% mean return with 11.34% standard deviation of annual returns. The results are based on simulated nominal returns and specified inflation adjusted withdrawals ($45,000/year). The simulated inflation model used historical inflation with 4.06% mean and 3.12% standard deviation based on the Consumer Price Index (CPI-U) data from 1972 to 2016.
Monte Carlo simulation results
||Median End Balance
||25th Percentile End Balance
||75th Percentile End Balance
||Probability of Success
60.00% US Stock Market
40.00% 10-year Treasury
Notes on results:
- Monte Carlo simulation uses historical data and thus assumes that the future will, to some extent, mimic the past. The actual future results may vary.
- The probability of success is based on the number of simulations the portfolio survives with a positive end balance.
- Maximum drawdown statistics are calculated from simulated annual balances including withdrawals/contributions.
- The results assume annual rebalancing at the end of each year. Taxes and fees are not taken into account.