Monte Carlo Retirement Planner

A retirement planner that’s a little more flexible

flexibleRetirementPlanner.com

Documentation — Output

Following a successful run of the planner’s retirement simulator, the center panel of the display is filled with the simulation results. The results of this planner are a bit different from other "calculator" type planning tools. Instead of displaying an algorithmically derived output for each year, the results show the average each year for of all of the data that was calculated during each of the 10,000 simulation trials. In this way, the data shown for each year (and overall) doesn't represent any one trial of the simulation, but rather the aggregate (usually the average) of all of the data that resulted from running through the simulation over and over.

The first thing to notice in the results is the Probability of Success. The probability of success shows the percent of simulation iterations in which the investment portfolio had at least some money in it at the end of the plan. 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 75% to be a failed plan. That would mean that in one out of five cases, their client would run out of money during retirement. Even a probability of success above 75% doesn't get a green light. The green light on the simulation traffic light is reserved for those plans that have a probability of success above 90%. Note however, that even with a 90% probability of success, one out of 10 people would experience problems with their retirement finances.

A second factor that goes into the decision of whether the plan gets a green light is the percent of the requested annual spending that the plan is able to fund. Because of the way spending is handled, an iteration (or trial run) of the simulation could complete with a significant amount of money left in the portfolio, without the retiree’s spending needs being met. This is because sometimes portfolio survival is prioritized above annual spending needs. In such a case, the programs drive to preserve the portfolio leads to retirees starving! For example, consider a case where the spending floor was set to 0% and during a simulation run, in order to keep the portfolio from running dry, the retiree’s requested expenses could only be funded at 40%. Clearly, this would be considered a failure by most financial planners. In order to get a green light, the simulation must end with a positive portfolio balance over 90% of the time, and it must (more often than not) give the retiree 90% of their requested annual spending amount over the life of the plan.

The bar chart on the left-hand side of the results panel displays the average portfolio balance for each year in the simulation. Each bar in the graph can be tri-colored to represent the taxable, tax deferred, and tax free components of the portfolio balance. You can move your mouse over the graph, to see the median portfolio balances for each year in the simulation. Finally, for any year where the percent of expenses funded is below 75%, the vertical bars of the graph are made hollow, instead of solid, to show that although the portfolio has a balance, the plan is not succeeding. One thing to keep in mind is that these balances represent the median 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. Also, the graph doesn’t give an indication of the amount of variation between the worst case and best case scenarios for average ending balance or for average ending spending percent.

Next, there are three checkbox controls just below the bar graph that allow additional data to be overlaid onto the graph. The first checkbox controls whether to show year-by-year data on the right-hand side of the graph panel. The default (unchecked) is to show a high-level summary for the simulation run. When the checkbox is selected, a vertical dashed red line appears and year-by-year data is displayed in more detail to the right of the graph. Clicking on different years on the graph will result in the corresponding data being displayed to the right of the graph. The next checkbox allows you to graph the percent of expenses that were funded in each year of the plan. The final checkbox controls whether to graph the number of failures (simulation trials where money ran out) that occurred in each year of the plan.

If you’d to see the complete output of a simulation run, click on the “Detailed View” tab at the top of the retirement planner window. This tab shows a copy of the graph that was shown on the summary view, along with a table that contains simulation data for each year of the plan. You can click on the header of the detailed output table to sort the data in the table and you can hide/show columns in order to customize the display.

Finally, back on the summary view tab, you can click on the “Show All Runs” button to see data from priors run of the simulation. You can select any row in the table at the bottom of the window to show a graph for the selected run. Also, you can right-click on any row in the table and see the details of the selected run. As with the detailed results table, you can sort the data in the historical results window by clicking on any column header and you can also hide/show columns in the table.

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