Retirement Monte Carlo Simulation Projections

How To Use:

This webpage is designed to help users simulate potential future values of an investment based on historical performances using the Monte Carlo method. By inputting initial investment amounts, expected returns, volatility, and other parameters, users can visualize a range of possible outcomes to better plan for retirement.

The withdrawal options provided in this tool help users customize their retirement planning strategies by allowing them to simulate different withdrawal scenarios. This can be critical for understanding how various withdrawal strategies impact the longevity and sustainability of their retirement savings.

The Monte Carlo simulation technique used here involves generating a large number of hypothetical scenarios for future rates of return, based on statistical inputs. This method provides a visual spread of potential investment paths, helping users understand the range of possible outcomes.

Why We Use Historical S&P 500 Returns and Volatility:

The Average Historical Return and Historical Volatility represent typical values based on past performance of the S&P 500. The average return gives an idea of what investors might expect to earn annually, while volatility indicates how much returns can fluctuate. These metrics help in assessing the risk and potential growth of investments.

Historically, equity investments have outpaced inflation, making them an essential component of long-term wealth accumulation strategies such as retirement planning.

Explanation of Inputs:

1. Initial Investment ($): Enter the amount you plan to start with when the investment is made.
2. Average Historical Return (%): The annual rate of return that the investment is expected to earn on average. Historically, the S&P 500 has returned about 8-11%, 8% is used as the default value here.
3. Historical Volatility (%): This represents the standard deviation of the investment's annual returns. For the S&P 500, historical volatility over a long period averages around 15%, but we've used 18% here to factor in additional uncertainty.
4. Number of Years: The duration over which the investment will be held. Ideally, this should be based on the length of your retirement planning horizon.
5. Number of Simulations: This refers to the number of individual paths the simulation will generate. Increasing this number provides a broader view of potential outcomes. A default of 100 simulations is chosen.
6. Optional Withdraw Parameters: Customize the withdrawal strategy for your simulation.
   1. Withdraw Type: Choose between:
   • No Withdrawals: No withdraws are taken out allowing for full growth.
   • Percentage: Perfect for testing the 4% rule and other variations. This helps simulate the impact of withdrawing a consistent proportion of the investment each year, adjusting for growth and volatility.
   • Fixed Amount: This option allows users to specify a fixed dollar amount to withdraw each year. It helps simulate the impact of withdrawing a set amount regardless of the investment's performance.
   • Fixed Amount + Inflation: Similar to fixed amount withdrawals, but this option adjusts the withdrawal amount for inflation each year. This helps simulate a more realistic scenario where the cost of living increases over time.
   2. Withdraw Amount (% or $): Specify the amount to withdraw. This can be a percentage of the investment or a fixed dollar amount.
   3. Withdraw Failure Threshold (% or $): Set a threshold below which withdrawals are considered a failure. This can be a percentage of the initial investment or a fixed dollar amount.
   4. Start Withdraw in X Years: Indicate the number of years after which withdrawals should start.
7. Run Simulation: After entering all inputs, click this button to see the possible futures of your investment.