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Monte Carlo Analysis: A More Thorough Approach to Planning for Your Retirement

Zachary Allegretti, CFP®

09/24/2020 — Download

Everyone knows they need to put money away for their retirement years, and the best way to get started is with a financial plan. The traditional approach to retirement planning is to determine how much you’ll need to live the lifestyle you want through those years, then determine how much you need to contribute to your financial plan to generate that amount.

This so-called “straight-line analysis” sounds simple, and it is. Maybe too simple. Let’s say you and your financial advisor have determined you’ll need to have a retirement account of $1.5 million at a retirement age of 62. That plus your social security benefits will see you through based on a long-term expected return on your investments of 8 percent annually. The problem is that volatility and sequence can easily upset your plans. A wide range of differing returns on your investments, how and when they change, could leave you short of your savings goal. Straight-line forecasting assumes consistent year-to-year returns, but the reality is that returns are not typically consistent.

At HBKS Wealth Advisors we forecast the probability that your plan will be successful through our financial planning software. We found that Monte Carlo analysis, a system that involves a thousand computer-generated simulations, gives our clients more confidence that they can weather difference market cycles. A Monte Carlo analysis allows you to see a spectrum of possible outcomes, taking into account a large number of variables and multiple potential values for each variable—different rates of return, various levels of inflation—and the historical performance of your investments. It takes into consideration your financial data—income, savings, your portfolio, time frames, financial goals, what you are spending now and will continue to spend in retirement.

A Monte Carlo simulation produces a “confidence level” that allows us to illustrate how your future finances could look based on your assumptions. The projections are characterized by a much higher degree of probability than a straight-line analysis of your chances of reaching your financial goals. Typically if a confidence level is below 75 percent, changes need to be made to the financial plan. We like to see a minimum 80 percent confidence level. If you get to 90 percent, you might plan to spend more in retirement, say, take an extra trip each year.

A Monte Carlo simulation can reveal how changes in your plan, such as how many additional years you’ll have to work to achieve the retirement savings you’ll need based on your spending habits, could affect your odds of achieving your goals. Combined with periodic progress reviews and plan updates, the forecasts help you and your financial advisor make better-informed investment decisions, to learn what you need to do to accommodate the lifestyle you want to live in retirement.

While no analysis can give you one hundred percent certainty in predicting whether your will meet your financial and retirement goals, a Monte Carlo analysis can help provide a better view of what is likely. Contact your HBKS financial advisor to ensure your financial plan is doing all it can to move you along your way to a financially secure retirement.

Your HBKS Wealth Advisor along with our tax partners at HBK CPAs & Consultants are ready to help you navigate these uniquely challenging times. Contact us at (814) 836-5776; or email me at


The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.

Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that future performance of any specific investment, strategy or allocation (including those recommended by HBKS® Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy or allocation may not be indicative of future results.

The historical and current information as to rules, laws, guidelines or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified, but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.

HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.

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